Umbrella companies are one of the most popular payroll services for freelancers and contractors in the United Kingdom. However, with so many unethical organisations encouraging tax avoidance and promoting 90 percent pay retention, how much should you realistically take home after the appropriate deductions have been made to your pay? We’ll explain take-home pay through an umbrella company so you are fully aware of what to expect.
Every umbrella company will charge a margin to use their service and this amount will vary amongst providers. As long as they are compliant, the margin is the only source of income for the umbrella company.
Please be aware that umbrella companies will deduct your margin before calculating your taxable income – making the cost even less to you compared to if it was deducted from your net salary.
National Insurance (Employees and Employers)
As an employee of an umbrella company, you will be required to pay Employee’s National Insurance (12 percent for those in Category A). Although the umbrella company you register with will officially become your employer, they do not directly benefit from the work that you are carrying out because they are not your end client. However, there is still an obligation for the umbrella company to pay Employer’s National Insurance at a rate of 13.8 percent. As a result, umbrella companies will recuperate this amount by deducting it from your pay. Don’t worry though – recruitment agencies generally increase the rate of pay for umbrella company freelancers and contractors to accommodate for this.
As an employee of the umbrella company, you will be entitled to holiday pay. This is worked out as 12.07 percent of the National Minimum Wage. You can choose to have this amount accrued or retained – just make sure you let your umbrella company know.
The Apprenticeship Levy is a government deduction that employers must pay (0.5 percent) if their annual turnover is over £3 million. Because the umbrella company will be acting as your employer but will not benefit from the work you carry out, this small contribution will be deducted from your salary and highlighted on your payslip.
Service and Inclusive Extras
Some umbrella companies will provide you with a basic payroll service and nothing additional. On the contrary, others will include some bonus features to try and entice you to their services and increase the value you receive when using them. For no added cost, Churchill Knight Umbrella provides the following for all of its clients:
- £10 million Public Liability insurance, £10 million Employers Liability insurance and £5 million Professional Indemnity insurance.
- Same Day Faster Payments, meaning you will receive your funds on the same day we do. Churchill Knight Umbrella run payroll on the hour.
- Churchill Knight Rewards is a discount scheme that is included in Churchill Knight Umbrella’s service at no extra cost. This allows contractors to take advantage of online discounts, money off at the high street, reduced rate meals at popular chains, low cost days out, and more.
- No joining fees, leaving fees or hidden costs.
- And more.
The following example is based on a fictional contractor who is earning £1,200 a week and is using a compliant umbrella company with a margin of £18 per week.
- The umbrella company receives £1,200.00.
- The £18.00 margin is deducted, leaving £1,182.00.
- The employer costs are then deducted from this amount (Employers National Insurance and Apprenticeship Levy).
- The deemed salary is left and is £1,017.58, plus holiday pay (£35.44). This leaves a total of £1,053.02.
- From the deemed gross salary, the employee deductions for National Insurance and PAYE tax are deducted.
- After all deductions, the contractor is left with £794.03 as their take home pay.
The above is for illustration purposes only and individual’s personal circumstances and their assignments may influence the take home pay.
Compliance is Critical
It is no secret that there is number of non-compliant umbrella companies out there who are offering their freelancers and contractors the chance to keep up to 90 percent of their pay. All you need to do is type “umbrella company” into Google and you will see a host of unethical companies who are paying for the privilege of being at the top of the search results.
Using one of these companies may seem like an excellent decision and surely enough, you will temporarily be able to keep far more of your hard-earned money (compared to using a compliant umbrella company like Churchill Knight Umbrella). However, HMRC is continuing to fight against offshore schemes. In the future, you could be faced with a catastrophic tax bill that you must pay immediately (there will be no option of a monthly payment plan). HMRC has made it clear they will not hesitate to retrospectively punish users of tax avoidance/evasion schemes and freelancers and contractors who have made an error in judgement have had to declare themselves bankrupt as a consequence.
For your peace of mind – use a compliant umbrella company that you can trust.