Umbrella company employment costs and other deductions

If you work via an umbrella company, you will see deductions including ’employment’ costs’ on your payslip. Here we explain what these costs are, and what to look out for following recent cases of malpractice in the industry.

What deductions do umbrella companies make?

If you are an umbrella company employee, your provider will make deductions from your contract income before calculating your net take-home pay.

Here we take a closer look at these deductions.

Employment Costs

As the umbrella acts as a payroll provider, not your employer in the traditional sense, all costs relating to your employment must come from your own contract income.

This is why you’ll be quoted two contract rates when you take up a new role. The higher rate is usually known as the ‘assignment rate’, or ‘umbrella rate’.

This rate has the following employment costs factored in:

• Employer’s National Insurance Contributions – this is applied at a rate of 13.8% on pay above £9,100 per year.
• Apprenticeship Levy – all employers with a turnover of £3m+ (including most umbrella companies) pay this at a rate of 0.5%.
• Umbrella Company Margin (Fee) – this is usually between £15 and £30 per week.
• Employer’s Pension Contribution – via Auto Enrolment. A minimum of 3% of your total qualifying earnings between £6,240 and £50,270 per year (2022/23).
• Accrued Holiday Pay – this is holiday pay you have chosen to save and use at a later date. Holiday Pay is taxed at the point it is retained under the accrual method. If your umbrella provides ‘rolled up’ (advance) holiday pay instead, this will not appear under ’employment costs’; you will receive your holiday pay entitlement each week/month instead.

Once these employment costs have been deducted, you are left with your Gross Pay which you pay personal tax on.

Income Tax

Like any employee paid via Pay As You Earn (PAYE), you pay income tax on your earnings according to the tax band you fall within; basic (20%), higher (40%) or additional (45%).

Employee’s National Insurance

Like Income Tax, Employee’s NI is deducted at source via PAYE. You pay Employee’s NI at 12% on income between £12,570 and £50,270, and 2% on income above £50,270.

Employee’s Pension Contributions

As an employee, you are auto-enrolled into your umbrella’s workplace pension scheme, unless you decide to opt out. Find out more here.

You pay a minimum of 5% of your total qualifying earnings between £6,240 and £50,270 into the scheme (2022/3). This is in addition to the ’employer’ contribution of 3%, which comes out of your assignment rate as an ’employment cost’.

Student Loan Repayments

If you’re paying back a Student Loan (Plan 1, Plan 2, or a Postgraduate Loan), this will be deducted from your post-tax income.

Make sure your umbrella is making the correct deductions

The umbrella industry is not regulated, unfortunately. This means that some umbrella companies have made incorrect deductions from their employees’ pay.

This might be as simple as adding a £5/week additional charge to their employment costs. Such small amounts are almost undetectable, but this has happened in the past.

More seriously, we have seen examples of umbrella companies holding on to employees’ holiday pay, if the contractor hasn’t requested a repayment under the accrual system.

If you want to make sure that your umbrella is only deducting legitimate things from your pay, try a free service like Payslip Buddy to check your numbers.

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