Joining an umbrella company is the easiest and most hassle-free way to get paid as a contractor or freelancer. If you choose to operate through an umbrella company you will be seen as an employee of that company. This means the umbrella company will deduct your tax and National Insurance Contributions (NICs) – exactly the same as if you were a permanent employee.
As an umbrella company employee, you are required to pay both employees’ and employers’ NICs. Whilst you are carrying out work on behalf of your end client, they are not seen as your employers so will not pay the employers NI. Similarly, whilst you are seen as an employee of the umbrella company (for tax purposes) they do not benefit from any of the work you are doing – so will not cover the cost of the employers NI. Employers National Insurance is secondary class insurance on all employees’ earnings at a rate of 13.8%.
You will then have to pay employee’s NICs on your income – this is calculated at 12% of earnings above £162 per week.
Income tax is also due on all earnings above the Personal Allowance (£12,500). Income tax is applied at either a basic rate, higher rate or additional rate depending on which tax bracket you fall into.
Please note – your agency should uplift your salary to take into account these additional deductions so your take home pay is not significantly reduced.
Every umbrella company will charge a margin to cover the cost of the administrative tasks they will be doing on your behalf. As long as they are compliant, the margin is the only differentiating factor between umbrella companies.
The Apprenticeship Levy is a government deduction that all businesses must pay if their annual turnover is over £3 million. The Apprenticeship Levy is 0.5% of the business’s annual turnover. As the umbrella company is acting as your employer but not actually benefiting from any of the work you carry out, this small deduction will be taken from your salary.
It is a legal obligation for umbrella companies to show that they are paying you holiday pay which is calculated at 12.07% of your hourly rate. By law holiday pay must be shown as a separate deduction on your payslip, however, this is simply a re-allocation of your salary and it won’t actually be deducted from you (unless requested).
It is possible for umbrella companies to retain your holiday pay, if this is something you would be interested in, and will hold it back for you until you request it.
Some contractors are signing up to umbrella companies which claim to maximise their take home pay and retain up to 90% of their income after tax and NI deductions have been made. The companies that offer these projections are most likely offshore intermediaries and promoting tax avoidance schemes. Contractors who use these schemes will receive their salaries via loans, credit or something similar. The companies that offer these schemes claim that tax does not need to be paid on these payment options. However, this is simply not the case as the payments are no different to normal income and therefore tax and NI contributions apply.
Umbrella Company UK can offer you a simple and compliant payroll solution. We’ll pay the correct tax and National Insurance to HMRC on your behalf so you have nothing to worry about.