Here is a list of the Top 10 most commonly asked questions by umbrella company employees, based on our experiences of working with umbrella providers (and contractors) over the past 10 years.
This guide covers everything from calculating your net take-home pay to dealing with pensions, expenses, and timesheets.
If you are new to the world of contracting, we recommend you read what are umbrella companies and how do they work?
Top 10 umbrella company FAQs
- How does the umbrella registration process work?
- How much will my take home pay be with an umbrella company?
- How do pension contributions work with an umbrella company?
- What are ’employment costs’ such as Employers NICs and the Apprenticeship Levy?
- What are the benefits of an umbrella company?
- How do I submit timesheets?
- What expenses can I claim?
- Why are umbrella companies offering a higher take home pay than others?
- Do I have to use an umbrella if my contract is caught by IR35?
- How do I leave an umbrella company?
How does the umbrella company registration process work?
Registering with an umbrella is easy, but it can be time-consuming. To ensure they follow legal guidelines, umbrella companies must request a lot of personal information, including your date of birth, address, bank details, assignment information, and more.
Once you have completed the initial registration process, you will need to provide your P45 or complete a New Start Checklist. Once you have done this, you will need to provide proof of your identity and right to work (RTW) in the UK.
Finally, you will be sent a Contract of Employment outlining the terms and conditions of your professional relationship with your umbrella company. You must read this thoroughly and only sign and return it if you are entirely happy with its content. If you have any questions, ask your umbrella company first – before you sign anything.
How much will my take home pay be with an umbrella company?
When you become an employee of an umbrella company, you will be paid via HMRC’s tax system called Pay As You Earn (PAYE). This means you will be paid as if you were working as a permanent employee for your end client (the umbrella company acts as an intermediary).
PAYE will result in most umbrella company employees retaining roughly 60% to 70% of their salary after all the legal deductions have been processed and sent to HMRC. These include income tax, Employee National Insurance Contributions (NIC) and the employment costs (Employer’s National Insurance and the Apprenticeship Levy).
You may also find your pay is also subject to additional deductions, including student loan repayment and pension contributions. It’s also worth noting that umbrella companies deduct a fee (margin) to cover the associated administration in exchange for processing your payroll. Every time you are paid by an umbrella company, you should be given an up to date payslip that outlines all the deductions that have been made to your pay.
Before you join an umbrella company, it’s a good idea to request a tailored take-home pay calculation based on your circumstances. The umbrella will then present you with an amount they expect you to retain (estimated) based on your pay rate, the hours you work, your tax code, etc.
A word of advice – be careful the umbrella companies you speak to do not inflate your pay retention to try and trick you into using their service over the competition. Sadly, this has been known to happen and has understandably frustrated contractors and freelancers.
We cover this in more detail later in this article under the question – Why are other umbrella companies offering me higher take home pay?
Do I have to contribute to a pension with an umbrella company?
When you join an umbrella company, you become their employee. This means that the umbrella company must legally enrol you into a pension scheme within 12 weeks. However, if you don’t want to make pension contributions – you don’t have to remain enrolled in the scheme.
Annoyingly, you cannot opt-out of pension contributions before the first deduction has been made. However, you will have an opt-out period (usually 28 days). Provided you meet this deadline, you can opt-out of future pension contributions and get the initial contribution repaid to you.
Pensions can be a frustrating aspect of working through an umbrella company, but they are part of employment law that the umbrella must comply with.
Umbrella companies will usually have a preferred pension provider, and in many cases, this provider is NEST (the government’s pension scheme).
What are the employment costs and why am I responsible for the employer’s national insurance contributions and the apprenticeship levy?
Perhaps the most debated aspect of working through an umbrella company is the employment costs. These are the Employer’s National Insurance Contributions and the Apprenticeship Levy. Here is how they work.
When you join an umbrella company, the umbrella becomes your employer for payroll purposes. However, you do not work for your umbrella company. Instead, you work for your end client, meaning the umbrella doesn’t benefit from your day-to-day job. As a result, the umbrella cannot afford to cover the Employer’s National Insurance Contributions and the Apprenticeship Levy, and these deductions are passed onto the contractor.
The employment costs are deducted from the assignment rate, which you negotiate with your agency or end-client before accepting the role. All parties in the supply chain should be aware of the employment costs and their impact. Most recruitment agencies offering roles through an umbrella company already offer a standard PAYE rate and an inflated “umbrella company rate” that considers the employment costs. Either way, contractors and freelancers should never be out of pocket due to the employment costs because these should be considered before accepting a role.
Read our dedicated articles on the Apprenticeship Levy and paying Employers’ NICs as an umbrella contractor.
What are the benefits of using an umbrella company?
Many temporary workers consider the employment costs (above) as a drawback to using the services of an umbrella company. However, there are a number of advantages of using umbrella companies too! While most umbrella companies offer a similar service, some offer added “little extras” that might encourage you to choose them over a competitor.
Here are some of the most common benefits (advantages) of using an umbrella company:
- Free insurance cover, including Professional Indemnity Insurance, Public Liability Insurance and Employer’s Liability Insurance.
- Access to the umbrella company’s online portal – a platform that makes submitting timesheets, asking questions and viewing payslips very easy.
- Rewards with an employee discount scheme, such as Perkbox. These schemes can help you save money when shopping at the high-street, purchasing goods online, and eating out at your favourite restaurants.
- Employee Benefits, including Statutory Sick Pay, Statutory Maternity Pay and Statutory Paternity Pay.
- Continuity of Employment, which can significantly help umbrella contractors get finance, for example, a mortgage. Continuity of Employment shows lenders that you’ve worked for one employer (your umbrella), rather than multiple, and this can help obtain large amounts of credit.
- Minimal administration as the umbrella company will do most of it for you. Once you’ve registered, all you will need to do is submit timesheets to be paid on time.
- Flexibility because you are not tied in to the umbrella company’s service. The umbrella’s margin is only applied when you’re paid, an you’re free to leave and rejoin whenever you want – without having to pay any hidden fees.
- A gentle introduction to contracting – because using an umbrella is easy and there is no tie in, it’s a popular payment method for professionals who are new to self-employment. It gives them the chance to work on some temporary assignments, without having to worry about setting up a limited company and the responsibilities that fall on the should of a director.
Please be aware that not all umbrella companies offer the same service and benefits will vary. Always check what an umbrella company offers before registering.
There are significant differences between working via an umbrella vs. your own limited company. In some cases, you won’t have a choice (e.g. your client will only hire umbrella contractors). Make sure you read our umbrella vs limited guide before deciding upon the best business structure to use.
How do I submit timesheets?
The process for submitting timesheets varies between umbrella companies.
Usually, you’ll be required to submit the hours you’ve worked via an online portal or mobile app – and this shouldn’t take longer than a few minutes. However, some umbrella companies are more “old school” and may require you to email in copies of timesheets that you’ve completed and signed by hand. It’s a good idea to speak with an umbrella and understand their timesheet processes before you decide to register with them or not.
Can I claim expenses with an umbrella company?
In 2016, the government introduced legislation called Supervision, Direction and Control. To put it simply, for the majority of contractors, this legislation ended the process of umbrella company employees being able to claim tax relief on travel and subsistence expenses.
It is possible to claim reimbursed expenses from your agency or end-client, but it depends on many factors and only applies to the minority of umbrella employees. Genuine work-related expenses, such as travel and overnight stays, can be claimed back, but not every umbrella offers this service.
In reality, after SDC was unveiled, many umbrella companies stopped processing expenses altogether because so few were eligible. If you think you might be entitled to claim genuine reimbursed expenses (e.g. for the type of expenses permanent employees would be entitled to), speak with your recruitment agency and your umbrella company.
Read more about umbrella company expenses.
Why are other umbrella companies offering me higher take home pay?
Compliant and ethical umbrella companies will provide you with a PAYE take-home pay calculation based entirely on your circumstances. This means the figure you’re given is accurate, and when you are paid, you’ll have a very similar amount paid into your bank and stated on your payslip.
Disappointingly, it’s common knowledge that some unscrupulous umbrella companies deliberately inflate the pay calculation they give to contractors – to try and trick them into joining their service over the competition. The way some providers inflate pay calculation is underhand. Some don’t consider any annual leave, while others deliberately use the wrong tax code.
In reality, compliant umbrella companies should process payroll identically – with PAYE. Therefore, the only thing that should impact your pay retention is the umbrella company margins you’re being quoted. For example, if you choose an umbrella with a £20 per week margin compared to one with a £30 per week margin, you should expect to retain a few extra pounds each week.
Tax avoidance schemes are also preying on vulnerable contractors and freelancers and are advertising upwards of 90% pay retention. Never be tempted to use a tax avoidance scheme. HMRC is consistently increasing its efforts to catch promoters of tax avoidance and those who engage with them. The consequences could be life-changing.
If you come across an umbrella offering noticeably inflated pay retention – avoid them at all costs and let your recruitment agency know. You should also report them to HMRC.
Do I have to use an umbrella company if I am inside IR35?
You do not have to use an umbrella company if you don’t want to, but it may reduce the number of assignments you can work on.
Some recruitment agencies advertise roles that must be paid through an umbrella, usually because the agency doesn’t offer payroll themselves. As a result of the April 2021 ‘off payroll’ (IR35) changes, many clients have outlawed the use of limited companies, so umbrella employment will be a necessity rather than a choice for some contractors.
If you’re used to contracting outside IR35 via a limited company, but you find yourself inside IR35 – the tax benefits of incorporation will no longer apply for that contract. If you have a choice of business structure, the umbrella route is a prudent one.
If you already have a limited company, you may decide to keep it live, in case you have a mix of inside and outside IR35 assignments; it all depends on your personal circumstances.
Some accountants offer ‘flexible’ plans whereby you can use your own limited company or an umbrella company, depending on the status of each contract.
How do I leave an umbrella company?
Assuming you’ve chosen a trustworthy and accredited umbrella company – leaving should be straightforward. Ring up your umbrella company, let them know you want to leave, and request your P45 to start the process.
The umbrella shouldn’t require anything else from your end. However, keep your recruitment agency up to date – especially if you’re switching to another umbrella because they’ll need to sign another overarching contract with your new provider.
Try these extra guides for more information before you sign up with a new provider.
- Umbrella company reviews – can they be trusted?
- What are the typical fees and costs of a PAYE umbrella provider?
- Limited vs. Umbrella – comparison table
- Our list of leading PAYE umbrella providers in the UK