It can be challenging to understand how net pay is calculated when you receive your first umbrella company payslip. However, the actual payslip is fairly straightforward to understand once you know what to look for.
In this guide, we explain what the inputs and outputs (deductions) on a payslip mean, using real-life example payroll data.
Umbrella company employee vs. permanent employee
Before we start, you should note that working via an umbrella company is different from being a permanent employee due to three key things:
- You pay the umbrella company’s margin (this covers the cost of running the umbrella).
- You cover the Apprenticeship Levy.
- You also cover the Employers’ National Insurance Contributions.
The Payslip
All umbrella company employees should always receive a payslip at the end of each pay period.
New payslip rules, which came into effect on 6th April 2019 (see PDF here), mean that employers must display the following information on all payslips:
- earnings before any deductions.
- earnings after deductions.
- fixed deductions.
- variable deductions such as tax and NI contributions.
It is a legal requirement to pay employers’ NI. However, as neither the client nor the recruitment agency is seen as your employer, they will not pay it.
The umbrella company does not benefit from the work you do, so the cost has been passed on to you – the contractor.
Find out more about why you pay the employers’ NI here.
Importantly, your recruitment agency should uplift your salary to take into account the employers’ NI (13.8%) and the Apprenticeship Levy (0.05%).
This means that you should not be left with a significantly lower-than-expected net take-home pay.
A typical umbrella company payslip includes the following sections:
Payments
This includes your basic pay, additional pay, holiday pay, overtime payment (where appropriate) and any sickness or maternity pay.
It is a legal requirement for umbrella companies to show they are paying you holiday pay. This is worked out at 12.07% of your hourly rate.
You can choose to have it paid to you each week (‘rolled up’), or it can be held by your umbrella company and paid in a lump sum when you wish (‘accrued’). You can find out about new rolled up holiday pay rules from January 2024 here.
Deductions
This section details all the employee tax deductions that you are required to pay for the current pay period, including Income Tax, NI contributions and pension contributions (where appropriate).
This Period
This section collates all the information and shows:
- How much you will be paid before any deductions are made (Total Gross Pay).
- How much tax has been deducted (Total Deductions and Employees’ NI).
If you are unsure if your umbrella is taxing you correctly, you can double-check how much tax you should be paying on the Government’s website.
Year To Date
Here you can see your Gross Pay to date and the total amount of tax you have paid to date.
Net Pay
Net Pay is the final amount of salary that you will receive after all the necessary deductions have been made.
The relevant deductions will be made and any tax payments will be paid to HMRC on your behalf (PAYE).
The Reconciliation Statement
The reconciliation sheet is a breakdown of how your pay has been calculated.
This includes the umbrella company’s margin, any pension contributions you have made, Apprenticeship Levy and Employers’ National Insurance Contributions.
An umbrella company payslip example
In this example, payment information is used to illustrate how an umbrella reconciliation statement and payslip work. The data is not specific to any given tax year.
This is how the calculations are made:
1. The basic pay of £1575.00 (RED) is calculated by the hours or days worked times the contractor’s rate of pay.
2. The company costs (GREEN) are deducted from the contractor’s pay.
3. £1575.00 (RED) – £347.52 (GREEN) = £1227.48 (BLUE) which is the contractor’s Gross rate of pay ready for tax to be
4. Note that holiday pay is shown separately (BROWN). The money is never actually taken away from you but it is a legal requirement to show that you are paid your holiday pay.
5. £1227.48 (BLUE) + £148.16 (Holiday Pay) (BROWN) = £1375.64 (PURPLE) this is the contractor’s salary (gross for tax) before employee tax and NI deductions.
6. The final deductions that need to be made are the income tax and employees’ NI Contributions which combined equal £423.37 (PINK).
7. £1375.64 (PURPLE) – £423.37 (PINK) = £952.27 which is the contractor’s net pay and the final amount which they will take home.
Many thanks to Clare Denison from Churchill Knight Umbrella for providing the example payslips.
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