If you become an umbrella company employee, your provider is in charge of collecting your contracting income from your recruiter and running the payroll via PAYE to deduct statutory and other taxes from your pay.
PAYE stands for Pay As You Earn. This means that, as an umbrella worker, you pay your tax and National Insurance contributions in the same way as a traditional employee.
This guide explains the deductions made at each stage of the umbrella payment process.
- The assignment rate (the amount of money paid to the umbrella from the agency).
- The gross rate (your gross pay after employment costs are taken off and before personal tax is deducted).
- You net take home pay (the amount of money that hits your bank account after all deductions).
All deductions should be illustrated on your Key Information Document (KID), and payslips.
Assignment rate (Umbrella Rate) and employment costs
When you start a new contract role, and it’s time to get paid, the recruiter transfers your assignment rate (umbrella rate) to the umbrella.
This is your gross pay, which has been uplifted to include employment costs.
Employment costs – deducted from your assignment rate
- Employers National Insurance – this article explains why this is included as an employment cost.
- Apprenticeship Levy – read this article to explain what this deduction means.
- Umbrella Company Margin is a fixed weekly or monthly fee for the umbrella’s administration.
- Employers’ Pension Contributions (3% if you have opted in) – see this article on umbrella pension contributions.
Gross Income (Gross Pay)
Your gross income is the assignment rate minus the employment costs listed above.
Advanced holiday pay is added
Your gross income includes holiday pay (assuming you have advanced or ‘rolled up’ holiday pay, paid every week or month rather than being accrued by the umbrella).
Net Take Home Pay – how is it calculated?
Statutory deductions are made from your Gross Pay. Like all employees, these are deducted via PAYE (Pay-As-You-Earn).
Your net take-home pay is also influenced by the following variables – personal to you.
- Your tax code (for most people, this is 1257A).
- If you have any income from other sources.
- If you have a student loan.
- The amount of pension contributions you make.
Employees’ Pension Contributions are deducted
If you are enrolled in your umbrella company’s workplace pension (all umbrellas are obliged to enrol you unless you opt out), any contributions you make are deducted from your gross pay before personal tax is calculated.
National Insurance Contributions (NICs)
Employees’ NICs are deducted from your gross pay.
For the 2024/5 tax year, employers’ NICs apply to salaries above £9,100 at a rate of 13.8%.
You pay employees’ NICs at 12% between £12,570 and £50,270 and 2% above £50,270.
Income tax
The amount of income you can receive before paying any tax is determined by your tax code.
For example, the 1257L tax code (2024/5 tax year) means you will not be taxed on income below the £12,570 mark (the current ‘Personal Allowance’).
After the Personal Allowance (£12,570 if you are eligible for the whole amount) is considered, the next £37,700 of income is taxed at 20% (the ‘basic’ rate).
Income from £37,700 to £124,100 is taxed at 40%, and any income received above this threshold is taxed at the ‘additional’ 45% rate.
So, you only start paying higher rate (40%) tax if you earn over £50,270.
For earnings over £100,000 per annum, the tax-free allowance is reduced by £1 for every £2 over £100,000 that is earned. Earnings over £125,140 are taxed at 45%.
Student Loan repayments
If you are paying back your student loans, repayments are made after tax has been deducted. Confusingly, loan repayments (the amount you have to pay back) are calculated on your pre-tax income. Find out how much you need to repay here,
Finally, after all of these deductions, you are left with your net take home pay!
Beware ‘higher net pay’ umbrella company claims
Finally, and this is vitally important, ALL umbrella companies operate under the same rules and regulations.
No magical formulae, elaborate schemes, or creative accounting allow one company to provide you with a higher net pay than another.
Here are some useful guides to make sure your net pay is accurate and to avoid any scrupulous umbrella providers: