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How does a PAYE umbrella company work?

In this article, we look at how the typical PAYE umbrella company works in practice, and what to expect when you sign up to a new scheme.

How does a PAYE umbrella company work?

Once you have chosen an umbrella company which suits your needs (the most important task), these are the typical first steps you will take as an umbrella company employee:

Signing Up

You will become an ’employee’ of the umbrella company. You need to provide your P45 or P46 form to get started together with administrative details such as your National Insurance number, bank account and personal details.

Contracts

Once you find a contract role, your PAYE umbrella firm will sign a contract with the recruitment agency. You will also sign a contract of employment with the umbrella company.

Timesheets and Invoicing

Each week or month, you will submit your timesheet details to the client, and your umbrella company.

The umbrella will then submit an invoice to your agency on your behalf – for the hours worked during the previous period. The agency will then pay the umbrella for the invoiced sum. Check with your umbrella how often they make payments, as some make payments the same day they receive funds, others may only pay once per month.

Payment

At the pre-agreed time in your cycle, the umbrella will pay you directly into your bank account. You should receive your invoice amount minus income tax (PAYE), Employees’ National Insurance Contributions (NICs), the umbrella fees, and any other deductions you have pre-agreed.

‘Employment costs’, which consist of Employers’ NICs and the Apprenticeship Levy are also deducted.

You may also see deductions for pension contributions and student loan repayments, if pre-agreed.

Depending on the arrangement you have in place with the umbrella scheme, you will usually be paid same-day or next day.

Expenses

During your time with the umbrella, you might also be able to submit expenses claims for pre-agreed items from your client – so-called ‘rechargeable’ expenses.

However, a significant change to expense claims by umbrella company employees resulted from the April 2016 SDC rules. If your contract work is deemed to be under the ‘supervision, direction and control or the right thereof’ of your client, you can no longer claim tax relief for travel and subsistence expenses.

Before you sign up!

With so many PAYE umbrella companies in the market, you should always spend time on research before signing up. The main difference between firms lies in the fees they charge, and the customer service experience (which is harder to quantify).

There are a number of unscrupulous ‘umbrella providers’ operating in the market, which may offer fantastic take-home pay percentages. Such schemes should be avoided. Aside from the umbrella margin/fee, there should be no difference in the way net take-home pay is calculated between PAYE umbrella companies.

Last updated: 15th February 2022