Contractors receiving their first umbrella company payslip can sometimes find it challenging to understand exactly how their pay has been calculated and what deductions have been made. However, the actual payslip is fairly straightforward to understand once you know what to look for.
This guide explains exactly how an umbrella company payslip is generated, and what the deductions refer to – 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 to being permanently employed due to three key things:
1. You pay the umbrella company’s margin (the cost of running the umbrella).
2. You cover the Apprenticeship Levy.
3. You also cover the Employers’ National Insurance Contributions.
Contractors are employees of their umbrella company and should always receive a payslip. As per the new payslip law, – which comes into effect on 6th April 2019 (see PDF here), employers are required to display the following information:
- 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 but as neither the client or recruitment agency is seen as your employer, they will not pay it.
Also, as the umbrella company is not benefitting from the work you are doing, the cost has been passed on to you.
Your recruitment agency should uplift your salary to take into account the employers’ NI (13.8%) and the Apprenticeship Levy (0.05%), so you should not be left with a significantly lower-than-expected salary.
A typical umbrella company payslip will include the sections that we have summarised below:
Here you will find 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 – which is worked out at 12.7% of your hourly rate. You can choose to have it paid to you each week, or it can be held by your umbrella company and paid in a lump sum when you wish.
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 section will collate all the information and will show you how much you will be paid prior to any deductions being made (Total Gross Pay) and how much tax has been deducted (Total Deductions and Ees NI).
If you think you are being taxed incorrectly, 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 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 are making, Apprenticeship Levy and Employers’ National Insurance Contributions.
An Umbrella company Payslip and Reconciliation Statement Example
For the purpose of this example, payment information has been used to illustrate how an umbrella reconciliation statement and payslip will work. The figures have been reached via the following calculations:
- The basic pay of £1575.00 (RED) is calculated by the hours or days worked times the contractor’s rate of pay.
- The company costs are then calculated which will then be deducted from the contractor’s pay.
- £1575.00 (RED) – £347.52 (GREEN) = £1227.48 (BLUE) which is the contractor’s Gross rate of pay ready for tax to be deducted.
- It is worth noting that the holiday pay is shown separately (BROWN). The money is never actually taken away from you but it is a legal requirement to show that umbrella companies are paying you holiday pay.
- £1227.48 (BLUE) + £148.16 (Holiday Pay) (BROWN) = £1375.64 (PURPLE) this is the contractor’s salary (gross for tax) prior to employee tax and NI deductions.
- The final deductions that need to be made are the Employee’s Tax and NI Contributions which combined equal £423.37 (PINK).
- £1375.64 (PURPLE) – £423.37 (PINK) = £952.27 which is the contractor’s net pay and the final amount which they will take home.
About Churchill Knight Umbrella
Many thanks to Clare Denison for creating this great guide.
Churchill Knight Umbrella provides compliant payroll services to contractors, backed by 20 years’ experience. Alongside a comprehensive full payroll service, you’ll benefit from free insurance cover and access to an exclusive rewards scheme. You’ll always be paid quickly too – thanks to same-day faster payments.
The service is ideal for first-timers, public sector workers and short-term contractors.
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