How does a PAYE umbrella company work?

PAYE Umbrella Company

This article looks at how a typical PAYE umbrella company works in practice and the steps you will take from being offered a new role to getting paid for the first time.

What is an umbrella company?

An umbrella company is a standard limited company that acts as an intermediary between workers and end clients. It also acts as an employer, managing payroll and other administrative duties.

When you contract through an umbrella company, they become your employer and process your pay through the PAYE (Pay As You Earn) system.

Additionally, umbrella companies often provide employment benefits such as statutory sick pay, maternity pay, and holiday pay.

For recruiters, umbrella companies offer a practical alternative to employing contractors directly. By outsourcing payroll and admin to these companies, recruiters can reduce their operational burden.

For contractors, using an umbrella company is a convenient and practical way to work. It provides continuity of employment, a quick setup process, and avoids the ‘hassle’ associated with running your own limited company.

How does a PAYE umbrella company work?

Here are the typical steps involved as a would-be umbrella company employee.

Find a new contract role.

The recruiter offers you a contract role.

When you have found a contract role of interest, your recruiter will offer you the job. They will usually have a list of preferred umbrella companies on a PSL, or you may be able to choose one from outside this list.

Choose an umbrella company

The recruiter must provide you with a Key Information Document (KID), which includes:

  • The umbrella company you are going to use.
  • The minimum assignment rate (a.k.a ‘umbrella rate’ or ‘day rate’) paid to the umbrella company.
  • What deductions the umbrella company will make from your umbrella rate.
  • Your minimum gross pay.

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:

Sign up process

Once you have signed up, you become an ’employee’ of the umbrella company.

To get started, you must provide:

  • A copy of your ID, such as a passport or driver’s license, for verification.
  • Your P45 or P46 form.
  • Your National Insurance number.
  • Bank account details.
  • Personal information (address, contact details, etc.).

Contracts are signed

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, which includes:

  • Your rights and obligations as an umbrella employee.
  • Details about your pay and any deductions.
  • Information on statutory benefits provided by the umbrella.

Timesheets and invoicing

Check with your umbrella how often they make payments. Some make payments the same day they receive funds, while others may only pay once per month.

  • You submit your timesheet details to your client or umbrella company each week or month (depending on the setup).
  • 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 the invoiced sum (your assignment rate for the period).

Umbrella pays you after making deductions

At the pre-agreed time in your cycle, the umbrella will pay you directly into your bank account.

You should receive a payslip each time the payroll is run. This should display your gross pay and net pay.

‘Employment costs’ consist of Employers’ NICs and the Apprenticeship Levy, which are also deducted. As an umbrella employee, your umbrella pays the Employers’ NIC, which has been factored into your assignment rate.

These employment costs are taken out first, leaving you with your gross pay.

Your net take-home pay equals your gross pay minus income tax (PAYE), Employees’ National Insurance Contributions (NICs), the umbrella fees, and any other deductions you have pre-agreed.

If pre-agreed, you may also see deductions for holiday pay, pension contributions and student loan repayments.

Depending on your arrangement with the umbrella scheme, you will usually be paid the same day or the next day.

Claiming expenses

During your time with the umbrella, you might also be able to submit expense 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 your client’s ‘supervision, direction and control or the right thereof’, you can’t claim tax relief for travel and subsistence expenses.

What happens when your contract comes to an end?

When your contract ends, you’re still an umbrella company employee (unless you decide to leave).

When you find new work, you can start a new contract whilst still being an employee of the same umbrella.

You typically use one umbrella for all assignments if you have multiple clients simultaneously. However, you will pay a separate umbrella fee for each assignment you’re working on to cover the administration costs.

Read this before you sign up!

With so many PAYE umbrella companies in the market, you should always spend time doing research before signing up. The main difference between firms lies in their fees and 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, PAYE umbrella companies should calculate net take-home pay the same way.

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