While umbrella company payslips provide essential information, they are complex and can be confusing. This guide explains what all the entries on a payslip mean and why they are there.
This article has been updated for the 2023/4 tax year
Your payslip will include your personal information, including your name, address and National Insurance number.
If this information is incorrect, or perhaps you have recently changed your address, let your umbrella company know immediately.
Every employee has a tax code, and this lets the employer know how much income tax to deduct from your pay and send to HMRC on your behalf. Pension providers also use your tax code.
The most common tax code in the UK for the 2023/24 tax is 1257L, which means you are entitled to receive the £12,570 tax-free allowance.
If you ever suspect you have an incorrect tax code, you can contact HMRC for clarification. If your tax code is changed, you will receive a letter in the post with your new code, and so will your employer, allowing them to update their system and pay you accordingly.
Unsurprisingly, your payslip will include your assignment rate – the amount you have agreed to be paid in exchange for the work you complete for your end client.
The assignment rate is your gross pay, plus an allowance for employment costs. These employment costs include employers’ NICs, the umbrella’s margin and the Apprenticeship Levy. See below.
The employment costs
The concept of employment costs confuses many umbrella employees – especially those who are new to using an intermediary for payroll purposes.
The employment costs consist of the employer’s national insurance contributions and the apprenticeship levy (more information below). They are passed on to the worker and will be stated on an umbrella company payslip.
Before you join an umbrella, you must understand the employment costs and ensure they’re taken into account when you negotiate your rate of pay with your recruitment agency or end client.
In theory, if you decide to use an umbrella company for your payroll, you should be issued an inflated rate of pay to consider the employment costs to ensure you don’t pay for them out of your pocket.
More and more agencies are now offering two rates of pay – a standard rate for agency PAYE, and an inflated rate of pay for those opting to use an umbrella.
If you believe your agency hasn’t considered the employment costs in your rate of pay, speak with them at your earliest convenience.
It’s important to remember that your umbrella company is not retaining these deductions and are not profiting.
The umbrella company’s margin
The only income that an umbrella company retains for itself is the margin they deduct, and this should have been discussed before you registered with them.
Usually, umbrella company margins are applied weekly or monthly and vary between providers.
You should expect to see the UK’s leading umbrella companies offering their payroll service for a weekly margin between £15 and £30 (or £60 to £120 per month).
The umbrella company margin will be deducted from your gross pay, meaning you save on the tax. Therefore, a £15.00 per week margin doesn’t leave you out of pocket by £15.00. The margin should be clearly stated on your payslip.
When negotiating your rate of pay, you must consider holiday pay. Your umbrella company must legally show holiday pay on your payslip as an employer.
However, the amount shown is a reallocation of your pay, meaning the 12.07% holiday pay is taken from your assignment rate (gross pay) and shown as holiday pay on your payslip.
Compliant umbrella companies will ensure you are issued your holiday pay each time you are paid or accrue it for you to claim a lump sum later.
You must discuss this with your umbrella before you join them and understand how holiday pay will be processed.
While most umbrella companies will process holiday pay transparently and compliantly, there have been a few accusations recently aimed at umbrellas that have retained employees’ holiday pay for themselves.
This is entirely unacceptable. If you believe your umbrella company has withheld your holiday pay, you should report them immediately.
Umbrella companies are legally required to enrol all employees into a pension plan within three months. However, if you would prefer to opt-out, this isn’t a problem, although you can only do it once you’ve made your first contributions.
The system isn’t very efficient, but it’s a legal requirement, and umbrella companies must follow the rules.
You will see your pension contributions on your umbrella company payslip. If you decide to stop making these, the amount should be zero.
Umbrella company employees are responsible for both the employee and employer pension contributions.
Student loan repayments
If you are currently repaying a student loan (any plan), you will automatically have your deductions taken from your gross salary by your umbrella company. No deductions would appear on your payslip if you didn’t have a student loan.
This is your income after the employment costs have been deducted.
You will pay income tax and employees’ NICs on your gross pay.
Income tax (PAYE)
Umbrella companies process payroll in accordance with HMRC’s tax system for employees called Pay As You Earn (PAYE).
The amount of income tax you pay depends on the amount of money you earn throughout a tax year.
For example, if you earn below the personal allowance of £12,570, you will not be responsible for paying any income tax. However, once you earn over the personal allowance, income tax applies.
Below are the income tax thresholds for the 2023/24 tax year:
- Personal allowance: £0 – £12,570
- Basic rate tax (20%): £12,571 – £50,270
- Higher rate tax (40%): £50,271 – £125,140
- Additional rate tax (45%): £125,140+
For example, an employee with an annual income (gross) of £60,000 and paid with PAYE will benefit from £12,570 tax-free. They will then pay 20% tax on their earnings between £12,571. 40% tax will apply to their earnings above £50,271.
There is the £100,000 abatement that needs to be taken into account, and it applies to higher earners. Many umbrella companies will not include this amount in take-home pay calculations – be wary.
For every £1 over £100,000 you earn within a tax year, you will lose £2 of your personal allowance.
Employee’s national insurance contributions
Employees who earn more than £12,570 per year will see class 1 national insurance contributions (employee’s national insurance contributions) on their payslip.
The rates of class 1 national insurance contributions are below
- £12,570 – £50,270 per year: 12%
- Over £50,270: 2%
It is possible to pay less employees’ national insurance if you meet certain requirements. For example, there is a marriage allowance, and your national insurance requirements may change if you have additional earnings.
Total pay (your net salary)
As you would expect, your payslip will show you your net salary – the total amount of your pay that you will retain after all of the deductions have been made.
Year to date figures (tax and NICs)
Your umbrella company payslip will show your year-to-date figures, and these will include the total tax, national insurance and income you have earned from 6th April.
To make sure that your umbrella company is making the correct deductions from your pay, try an online payslip checker.