Here is a list of the Top 10 most commonly asked questions by umbrella company employees, based on our experience working with umbrella providers and contractors over the past decade.
This guide covers the key areas contractors typically ask about — including take-home pay, pensions, expenses and timesheets.
Umbrella company employees are paid via PAYE and typically take home around 60–70% of their contract rate after tax, NICs and employment costs. While umbrellas handle payroll and administration, it’s important to understand how your pay is calculated – and exactly what deductions are made, and why.
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 must provide your P45 or complete a New Start Checklist. Once you have done this, you must 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 before signing 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), unlike working through your own limited company where income is typically split between salary and dividends.
PAYE will result in most umbrella company employees retaining typically around 60% to 70% of their contract rate 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).
These costs are not an additional charge from the umbrella, but form part of the overall contract rate agreed with the agency or end-client.
You may also find that your pay is 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 joining 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, work hours, tax code, etc.
Be careful that the umbrella companies you speak to do not inflate your pay retention to try to encourage you to use 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). If you meet this deadline, you can opt out of future pension contributions and get the initial contribution repaid.
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 does not benefit from your day-to-day work. As a result, the umbrella cannot afford to cover the Employer’s National Insurance Contributions and the Apprenticeship Levy, and these deductions are passed on to 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 provide a standard PAYE rate and an inflated “umbrella company rate” that accounts for these costs.
Either way, contractors and freelancers should never be out of pocket for employment costs, as 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) a drawback of using an umbrella company. However, there are several advantages. While most umbrella companies offer similar services, some provide additional features that might encourage you to choose them over competitors.
Here are some of the most common benefits 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.
- Employee benefits, including Statutory Sick Pay, Statutory Maternity Pay and Statutory Paternity Pay.
- Continuity of employment, which can help when applying for finance such as a mortgage.
- Minimal administration, as the umbrella company will do most of it for you.
- Flexibility — you are not tied to the umbrella company’s service and can leave without penalties.
- A gentle introduction to contracting, without the responsibilities that fall on the shoulders 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 company and your own limited company. 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. However, some umbrella companies may require you to email signed copies. It’s a good idea to understand the process before registering.
Can I claim expenses with an umbrella company?
In 2016, the government introduced legislation called Supervision, Direction and Control.
For most contractors, this ended their ability to claim tax relief on travel and subsistence expenses.
It is possible to claim reimbursement for expenses from your agency or end client, but this depends on your circumstances and applies only to a minority of umbrella employees.
In reality, after SDC was introduced, many umbrella companies stopped processing expenses altogether because so few were eligible.
Read more about umbrella company expenses.
Why are other umbrella companies offering me higher take home pay?
If an umbrella is offering significantly higher take-home pay than others, it is usually a red flag. Compliant PAYE umbrellas should produce very similar net pay figures, with only small differences based on margin.
Compliant and ethical umbrella companies will provide you with a PAYE take-home pay calculation based entirely on your circumstances.
It is well known that some umbrella companies deliberately inflate the pay calculation they give to contractors to encourage them to join.
In reality, compliant umbrella companies should process payroll in the same way. The main difference should be the umbrella company margin you are charged.
Tax avoidance schemes are also advertised with very high retention rates. Never be tempted to use them. HMRC continues to target these schemes, and the consequences can be severe.
Do I have to use an umbrella company if I am inside IR35?
You do not have to use an umbrella company, but it may reduce the number of assignments you can work on.
Some recruitment agencies require umbrella engagement, and following the April 2021 off-payroll (IR35) changes, many clients no longer engage limited companies.
For a full explanation of how IR35 works, see our IR35 guide.
If you are used to contracting outside IR35 via a limited company but move inside IR35, the tax benefits of incorporation will no longer apply for that contract.
How do I leave an umbrella company?
Assuming you’ve chosen a trustworthy umbrella company, leaving should be straightforward. Contact your umbrella company, inform them, and request your P45.
You should also keep your recruitment agency informed, especially if switching providers.