What is an Umbrella Company? Why do I need one?
It’s got nothing to do with the UK’s notoriously drab weather… Umbrella companies are essentially there to provide payroll services to the “flexible workers market” i.e. locums and temporary workers.
When you sign a contract with an umbrella company they become your employer, and you will submit your weekly timesheet to them to be paid.
For example, your recruitment agency found you a locum position at a hospital working 37.5 hours per week for £25/hour. At the end of the work week you will fill out your timesheet detailing the hours you worked and submit it to your recruitment agency, who sends it on to your umbrella company. (See my article about recruitment agencies here).
The hospital (known as the “end client”) will pay your recruitment agency for your services. Your recruitment agency will pay your umbrella company (retraining a margin) and your umbrella company will pay you (after retaining their margin). Capisce?
Why so many middle men?
It can be frustrating to have so many people taking their cut of your wages when you’re the one doing all the hard work. But there’s a reasonable explanation.
In the past recruitment agencies have done all of their own pay roll. By offloading some of the work and extra costs associated with paying their workers (leave entitlements, sick pay, pensions etc.) they save money and get to focus just on finding you the right job.
What does an umbrella company do exactly? Do I have to have one?
Basically they take you on as the employee, pay you your wages, and pay the HMRC (UK Tax Office) your income tax and National Insurance (NI) contributions. It’s a payroll service.
In theory you don’t HAVE to have an umbrella company. You could just take on jobs advertised as Pay As You Earn (PAYE) by your agency, but you may not always have this option available for every role so you could limit your job opportunities.
Having one umbrella company also means you can easily go between recruitment agencies for different jobs and still have one employer pay your wages, making things easier at tax time.
It’s not a bad idea to have one.
Umbrella hourly pay rates are higher than PAYE, do I earn more?
Sometimes. You will usually see higher hourly rates advertised for umbrella paying roles compared to PAYE roles because the rate includes all of the additional fees, taxes and allowances you’re due to be paid as an employee. Think of it as your gross wage including all of your entitlements before any deductions are made. The higher rate incorporates ALL the costs associated with employing you.
For example a job is advertised as £15 per hour PAYE or £20 per hour umbrella:
- If you take it on through an umbrella company you will earn £750 for a 37.5 hour week gross, but will have deductions for income tax, employee NI, employer NI, agency fees, umbrella company fees, holiday pay, pension contributions…
- If you take it on as PAYE you will earn £562.50 for a 37.5 hour week, minus deductions for your income tax and NI only.
At face value it can seem like an awesome deal, but when deciding to take a position as PAYE or through an umbrella company you have to do a few calculations to determine which one will actually leave you better off.
This HMRC PAYE calculator might give you a hand to do the sums.
How should my Umbrella Company charge me?
Fees vary from company to company but average around £15-25 per week.
You shouldn’t have to pay them any fees directly. You will only pay them for the weeks they process your pay (not every week of the year) and the fee will be deducted from your wages.
What do all these things on my payslip mean?
I’ve personally found umbrella companies very confusing to deal with, and there does seem to be what’s described as a “lack of transparency” in the industry (including rumours of tax-evasion and dodgy offshore stuff going on in the past). Plus, if they don’t calculate all of your deductions correctly, you could be the one left responsible for some big tax bills to the HMRC (unfair right?). With this in mind I was a bit freaked out when I got my first payslip which just looked super confusing with all sorts of numbers and deductions all over the place that did not make sense.
Hot tip: if you get a payslip that sounds like mine, and your umbrella company can’t give you a clear explanation for their calculations, they’re probably doing the dodgy. Best to get a new one.
I’ll do my best to explain a few of the terms you may legitimately see on your payslip:
- Gross rate and hours worked: self explanatory, this will be the hourly rate you negotiated with your recruitment agency multiplied by the hours worked
- Margin: the fee you pay the umbrella company e.g. £20/week
- Employer’s National Insurance (NI): your umbrella company’s compulsory contribution towards your NI
- Employee’s NI: your compulsory contribution towards your NI
- PAYE Tax: your income tax
- Pension: if you elect to invest money into a pension fund
- Holiday pay: this may or may not be added to your weekly pay (see the heading below about annual leave)
- Gross salary/pay: your before tax pay minus the fees listed above
- Net pay: your take home pay after tax
Do I get paid annual leave?
In a word, yes. But not when you take time off.
Full time employees in the UK are entitled to 28 days of paid annual leave per year. If you work part-time this is calculated pro-rata. As an employee of an umbrella company this includes you.
You may notice a section of your payslip titled “holiday pay”. This is a weekly payment of your annual entitlement known as “rolled up” holiday pay. Rather than paying you when you take your annual leave, the umbrella company can pay you your weekly entitlement based on the number of hours you’ve worked. It’s not an addition to your pay, but included in the flat hourly free you negotiate when taking the job.
If you aren’t paid on the “rolled up” system make sure you contact your umbrella company to ensure you’re paid out for any accrued annual leave you haven’t taken at the end of your contract.
Do I get paid sick pay?
Not if you’re only off work for 1, 2 or 3 days.
Unfortunately as a locum/temporary employee, if you don’t work the hours you don’t get paid. That’s what makes being in a permanent role so secure and attractive for most people.
However, as an employee of an umbrella company you will be entitled to the UK’s normal Statutory Sick Pay (SSP) Scheme, even though you’re an agency worker.
Under the SSP your umbrella company will pay you up to the maximum of £92.05 per week (minus tax and NI) if you’re off work 4 or more days in a row, earn more than £116 per week on average, and tell your umbrella company that you’re sick before their “deadline” (usually within 7 days).
You’ll need a fit note from your doctor if you’re off for more than 7 days in a row.
They’ve signed me up to a pension fund, what is it and do I need one?
A pension fund is a retirement fund, like superannuation in Australia. You may find you’ve been automatically enrolled in a pension (e.g. NEST) by your umbrella company as they are legally required to do this as your employer.
As I am not your financial adviser I can’t tell you whether or not to keep a pension fund in the UK.
However, it is very easy to opt out – usually over the phone or through the pension fund’s website – if you do decide to do so.
Any money you do invest into a pension fund will be another deduction from the flat hourly rate you negotiate for your job assignment with your recruitment agency, not an additional payment on top of your pay. But on the flip side there are tax benefits… If you’re not sure, best to speak to a professional about your individual circumstances.
I’ve heard some rumours about claiming expenses like travel and accommodation…
It used to be the case that agency/umbrella workers could claim tax relief on expenses like travel and accommodation related to completing job assignments, but the government has closed the tax loophole that allowed this.
Unless you’re using your own car during work hours (e.g. for home visits in the community) it’s not likely you’ll be reimbursed for any expenses. Even if you did qualify for anything, this would be taken from the hourly rate you negotiated with your agency, not paid on top of your normal pay.
Just keep receipts for any work-related expenses and you may be able to claim them as tax-relief on a P87 form at the end of the financial year (see my article on the UK tax system for more on this).
How do I pick a good umbrella company?
Good question, I haven’t found the perfect one yet!
For what should be a very regulated industry with all sorts of compliant requirements, I’ve always felt a bit uneasy when dealing with these businesses (they tend to be a bit cagey, and play their cards close to their chest when you start asking questions…)
What you’re looking for in a half decent umbrella company is someone who is FSCA approved, easy to communicate with, charges a reasonable weekly fee, offers full employment rights, provides a few extra perks (like member discounts on shopping etc.), good customer service, and most importantly will pay into your UK bank account on time.
Any company who suggests they can get you a larger percentage in your take home pay is likely to be doing something dodgy, and not paying the full amount of tax. If you’re found out you will be the one in trouble with HMRC and repaying the large tax bill with interest, not your umbrella company (unfair right?). Avoid these ones by asking for a sample pay slip to check their figures.
Your recruitment agency will probably get a nice little bonus for referring you to an umbrella company they have an existing relationship with, but you don’t have to go with their recommendation. Do your own research before signing the contract.
PRISM is a not for profit organisation that represents a few umbrella companies who hold themselves to a certain standard, so you may find one of their accredited members is a good place to start.
It’s also worth noting here that once you pick an umbrella company it’s best to try and stick with them. Chopping and changing between different recruitment agencies and jobs is fine, but can mean your PAYE income tax isn’t always calculated correctly. If you remain with one umbrella company, you’re essentially staying with one “employer” and will hopefully simplify the process, saving you from a nasty surprise tax bill at the end of the financial year.
Hopefully this makes the whole umbrella company situation a little more “transparent” for you, but if there is anything you need a bit more clarity on don’t hesitate to get in touch and I’ll do my best to help you out!
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