One of the most common issues raised by umbrella contractors is around the complexity of umbrella payslips.  Well, it’s less about the pay SLIPs and more about the pay BREAKDOWN.  Whilst umbrellas are employers in the broadest sense of the word, they don’t operate in exactly the same way as “normal” companies and this is reflected in the paperwork each contractor receives every week or month.

Where’s my money?

The most important thing to remember when you work for an umbrella company is that the money they receive from your agency or client is THEIR money (officially at least).  This is the same as any other company – if your employer gets paid by a client, you don’t expect all the money received to go to you.  The company will pay tax, National Insurance and many other costs from this income, including employee remuneration. Effectively this is the same for umbrella companies.

Why is my payslip in two parts?

Most umbrella payslips are delivered in two parts to make things as clear as possible for their contractors.  There will normally be a standard payslip, like any other you may have received in the past showing your gross pay and any deductions.

But this is where the second part becomes essential.  Normally known as a pay breakdown, it’s this second document that shows what the umbrella company has done with the money they have received from your agency or client before they arrive at your gross pay for tax purposes.  This is the document that raises most queries and is often not well explained by umbrellas when they onboard new contractors.  But it’s very simple when explained clearly.

Pay breakdown

The pay breakdown will normally show the following:

Company income – this is the amount the umbrella has invoiced your agency or client for and is normally broken down to show the number of hours/days worked and the rate agreed for the role.  This is the umbrella’s only source of income so certain deductions need to be made from this amount before it becomes your gross taxable pay.

Employer’s National Insurance – like any employer, an umbrella company has to pay Employer’s NI on their employees’ wages.  Normally the rate you agree with your agency/client is uplifted to take this cost into account.

Company Margin – this is the amount that the umbrella company charges to process your pay for you.  It is taken from the gross amount received so effectively you receive tax relief on this margin.

Apprenticeship Levy – all companies with a wage bill over a certain amount are obliged to pay this levy which is used to pay for the UK’s apprenticeship schemes.  This is the same for umbrella companies.

Employer’s Pension Contribution – if you are enrolled in the umbrella’s pension scheme, this deduction will be made automatically and paid to the pension provider

It’s only after the deductions above are made, that the remaining money becomes your gross pay for tax purposes.  It is therefore important that when you are negotiating your rate for the assignment you are on, that you are aware of these costs and ensure that the rate you agree is sufficient to cover them and give you the level of income you require.

Payslip

The next document is your payslip which goes into detail of how your gross pay is taxed and what personal deductions are made.  The payment you receive is normally broken down into 3 elements:

Basic pay – umbrella companies must demonstrate that they are paying AT LEAST National Minimum Wage (NMW).  This basic pay is therefore normally expressed as the number of hours you have worked in the pay period multiplied by the current NMW rate.

Holiday Pay – most umbrella contractors choose to have their holiday paid up front with each of the payments they receive and make their own arrangements for when they take time off.

Commission (sometimes known as additional pay) – this is what you earn over and above NMW. Essentially, what is left out of the money received once the basic pay and holiday pay have been accounted for.

The rest of the payslip is pretty conventional – normal deductions will be made:

• Tax under PAYE
• Employee’s National Insurance
• Employee’s pension contribution (if applicable)

The payslip will also show your earnings and deductions to date, your tax code, your National Insurance number, your payroll identification number and finally your net pay.

Is my payslip compliant?

All the information above assumes that you are working with a fully compliant umbrella company like Meades Umbrella.  If there is anything on your payslip that doesn’t seem inline with the above, then you may be working via a tax avoidance scheme.

Common terms that could identify schemes that can put you at risk are things like “Bonus Advance” or “Loan payment” appearing on your payslip.  If you’re not sure then speak to HMRC (or us) before it’s too late and they will check that you are not in danger of a big tax bill in the future.