Working Through An Umbrella Company.

Umbrella companies can be confusing, as often they are not very transparent about what they do, but there is also a lot of misinformation about what they do.

So, what is an Umbrella Company?

Umbrella companies are businesses that take on agency workers and other types of temporary workers as their own employees with contracts of employment. Their sole purpose is to employ people often called contractors.

They may give you a continuous contract of employment, which means that the employment relationship will continue after a particular assignment ends. More commonly now, as the tax advantages to using umbrella companies are limited, they are more likely to issue employment contracts that terminate automatically when an assignment ends.

Working through an Umbrella Company

Historically if you found work through an agency, they would normally deal with your pay themselves. This means they would become your employer and handle your pay and carry out other employer obligations.

However these days agencies prefer not to do this as it saves them time and money, freeing up their time to concentrate on matching workers with available work and it is not against the law for them to do this. Because the Umbrell company become your employer, they will deal with all your pay and employer obligations instead of the agency. This includes paying you your wages with tax and NI deducted as required by the PAYE system.

As an employee of the umbrella company you have the same right as any other employed person. Some of these include:

· The right to be paid a minimum wage

· The right to paid holiday

· The right to be enrolled in a pension

· The right to statutory payments such s sick and maternity pay (if you meet the requirements)

Travel Expenses

Before April 2016, if you worked through an umbrella company you could sacrifice some of your salary and get expenses of travelling to and from your assignment locations and home reimbursed on a tax and NIC free basis instead. This has now been closed to anyone working under “supervision, direction or control of any person. This definition will apply to most workers/ employees

You may still qualify for relief on travel expenses incurred while working ( e.g. traveling to clients premises) as opposed to going to work. So, you need to be very wary of any umbrella company that say they can still process home to work travel expenses.

Calculating Holiday Pay

Full time workers have the right to a minimum of 28 days paid leave including bank holidays. If you work irregular hours your holiday entitlement will probably be calculated as a percentage of hours. 28 days paid leave works is 5.6 weeks (28 days /5 days ) is equivalent to 12.07% (5.6 weeks / 46.4 weeks ) assuming a working year is 46.4 weeks (52 weeks – 5.6 weeks).

Example:

Josh works 15 hours one week, 21 hours the next week and 19 hours for the next two weeks. After nearly a month of working, he has worked for 74 hours and built up a holiday entitlement of 9 hours (74*12.07%) of paid leave. If he usually earns £16 an hour, he would be entitled to £144. It worth noting that holiday pay is usually calculated based on your average pay rate in the preceding 52 weeks in which some work is done, including bonuses, overtime and commission where relevant.

For holiday years starting from 1st April 2024, there is now an alternative method available where employers want to use rolled up holiday pay. Rolled up holiday pay is when an employers adds an extra amount of money onto a workers pay in each pay period to cover their holiday entitlement instead of paying them when they take time off. This a calculated as a minimum of 12.07% of the worker’s earnings for that period and must show it as a separate item on the payslip.

One thing to bear in mind is that this holiday pay is subject to Pay As You Earn (PAYE) tax and National Insurance contributions and rolled up holiday should never be used to top up pay to meet the National Minimum Wage.

A tip here is to check how the Umbrella Company will deal with your holiday, so ask the question. If it is not paid to you monthly or weekly depending on the frequency of your pay, (i.e. as rolled up pay), then ask them to confirm the circumstance in which you may lose any accrued holiday pay. If you leave the Umbrella company as them to confirm that all outstanding holiday pay will be paid to you with your final payment.

How Much Will You Be Paid if You work Through and Umbrella Company?

This is where things can get complex, so it is worth taking the time to understand how you get paid when you work through an umbrella company.

If you are paid by an agency directly then the rate they offer you, also known as the PAYE rate is the amount you earn before paying tax and National Insurance. So, if your PAYE rate is £13.50 per hour and work 35 hours a week, then your gross earnings in the week will be £472.50. You will then have tax and NI deducted from this. But the £13.50 is not the true cost to the agency of paying you. They have to pay things like employer’s national insurance contributions, apprenticeship levy and employer’s pension. As such, the cost to them of taking you on may be something more like £18.50 an hour. But you are not entitled to be paid the full amount of £18.50 – you are only entitled to £13.50.

When an agency hands you to an umbrella company they should pass to the umbrella company the full costs of your employment , that is the £18.50 an hour (from the funds they have received from the end client for your services). This rate is commonly known at the limited company rate.

It is therefore important that you are clear and understand the headline rate or the limited company rate is very different to the PAYE rate. Once the umbrella company has deducted all the employment costs and their charge you are in a no worse position than if you just received the PAYE rate from the agency in the first place. Umbrella companies can now explain all the charges to you, including giving you an idea of how much your net pay will be if you ask them, so it is important the ask the question so you dont get a shock when you get your first payslip.

Blog content is for information purposes only and over time may become outdated as the tax landscape is constantly changing, although we do strive to keep it current and up to date. It is written to help you understand your taxes and is not to be relied upon as professional accounting, tax and legal advice. For additional help please contact our team, or a professional adviser.