Receiving your first payment from an umbrella company can often be confusing, especially if you are new to contracting or have previously worked via a limited company. Before registering with an umbrella company, contractors usually ask: “How much money will I earn when I work via an umbrella company?”. Our latest article outlines the deductions that will be taken from your salary to help you better understand what your take-home pay might be when working via an umbrella company.
How much money will I earn when I work via an umbrella company?
If you use an umbrella company for your payroll, the amount of money you will earn will depend on the taxes you are required to pay and the umbrella company’s weekly or monthly margin. Pay As You Earn (PAYE) is HMRC’s system for collecting income tax and National Insurance. All compliant umbrella companies in the UK will process your pay using PAYE.
HMRC sets the required tax deductions and amounts. Provided you are only using compliant umbrella companies, the only thing that will alter your take-home pay is the margin they charge for processing your payroll. All other deductions will be the same.
What deductions will affect how much money I will earn when using an umbrella company?
When you use an umbrella company, the tax you must pay will affect how much money you will earn. Your end client or recruitment agency will send the assignment rate multiplied by the number of hours/days you have worked to your umbrella company when you are due to be paid. The assignment rate is your gross rate of pay plus an uplift to cover the employment costs.
Even though the umbrella company employs you, the work you do is for the end client. The umbrella company does not profit from any of the work you do. However, as an employer, the umbrella company is legally required to pay the employment costs. In order to cover the employment costs, recruitment agencies will often include an uplift in the rate offered to contractors who operate via umbrella companies. If you are considering getting paid by an umbrella company, it is important that you are satisfied with the uplift provided.
The umbrella company will deduct the following amounts from the assignment rate:
- Apprenticeship levy – 0.5%
- Employers National Insurance – 13.8%
- Umbrella company margin (weekly or monthly)
- Employers pension deductions (if you do not opt-out) – 3%
- Holiday pay – 12.07%
Your holiday pay must be deducted from the assignment rate and then paid back to you alongside your normal salary. Alternatively, you can choose to accrue your holiday pay and have it paid to you at a later date.
The gross rate of pay is the amount that is left after the employment costs have been deducted from the assignment rate. The gross rate of pay is the amount you are due to be paid (before tax deductions). The umbrella company will deduct the following from the gross rate of pay:
- Income tax – Basic rate income tax is 20% on taxable income between £12,571 – £50,270, higher rate income tax is 40% on taxable income between £50,271 – £125,140, and additional rate income tax is 45% on taxable income over £125,140
- Employee National Insurance Contribution – 8% on earnings between £1,048.01 – £4,189 per month or 2% on earnings over £4,189 per month
- Employee workplace pension contribution (if you do not opt-out) – 5%
- Student loan repayments (if applicable)
- Other deductions you are legally required to pay
Your net payment is the remaining amount after employee taxes have been deducted from your pay. This is the amount that will be paid into your bank account and constitutes your take-home pay. Please visit the government’s website for more information about getting paid when working via an umbrella company.
Top 10 umbrella companies
If you want to register with an umbrella company, why not check out our top 10 umbrella companies? Every umbrella company included in our top 10 umbrella companies list is accredited by the FCSA or Professional Passport. Whichever umbrella you decide to use – we highly recommend only considering those accredited by the FCSA or Professional Passport.
You can also request a callback from a top 10 umbrella company to ask any questions about umbrella payroll; they will be happy to help.
To find out how much money you could earn when working via an umbrella company, why not request a take-home pay calculation from one of our top 10 companies? Fill in the short form (available here), and they’ll contact you at a convenient time to discuss their service and provide an accurate take-home pay calculation.
