Understanding umbrella company pay: A guide for contractors

Figures suggest that there are as many as 700,000 contractors today working through umbrella companies, many of whom were prompted to do so when the off-payroll working legislation was rolled-out. 

That large number makes understanding umbrella company pay worthy of a guide for contractors, whose key to unlocking umbrella pay is their payslip and knowing what that payslip should reflect, wites Crawford Temple, CEO of the UK’s largest independent assessor of payment intermediary compliance Professional Passport.

Understanding umbrella company pay = get properly paid, and detect any impropriety

But, if you're a contractor working through an umbrella, the other big reason it’s crucial to understand umbrella company pay, and in turn your payslip, is so you can ensure you're not falling victim to any dodgy schemes.

Again, the payslip is of a paramount importance.

So -- an umbrella payslip typically has two parts: the payslip itself showing your pay details, and the ‘Pay Report’ showing the income received by the umbrella and deductions applied.

What is the Pay Report part of a payslip?

The pay report should show the total income that the umbrella company received from the agency or client for the work you performed during that pay period.

Recommendation: Carefully check that this amount matches your expected earnings based on your agreed rate and hours worked.

Be wary if the amount seems lower than it should be, as this could indicate a disguised remuneration scheme trying to pay you a portion of your earnings untaxed. These ‘DR’ schemes are illegal and should raise major red flags.

What are key deductions on the Pay Report part of an umbrella payslip?

The Pay Report will also itemise deductions from the umbrella company's income, such as:

• The umbrella company's margin i.e. the fee it charges you.
• Employer's National Insurance contributions.
• Apprenticeship Levy (if applicable based on company size).
• Employer pension contributions (if enrolled in a workplace pension).
• Holiday pay accrual.

Recommendation: Insist on a full breakdown of these employment costs. If the umbrella refuses or tries to bundle lots of charges into one opaque "employment costs" line, be very sceptical as this could hide questionable deductions.

Now back to your payslip.

After these deductions, you'll see your gross taxable pay which should match the gross pay transferred to your payslip.

The Payslip: what SHOULD contractors using an umbrella see?

On the payslip portion, you should see:

- “Gross taxable pay.” This should equal the gross pay on the Pay Report

- “Tax, National Insurance,” and any other mandatory deductions.

- “Net pay.” This is the sum which should hit your bank account, and as one payment.

Your gross pay may be shown as a National Minimum Wage “salary” plus a further supplemental “bonus” amount. This structure is fine, but the full amount should be fully subject to PAYE tax.

Recommendation: Be wary of any provider, scheme or ‘umbrella’ saying part of your pay (like the “bonus” portion) is non-taxable, as that would suggest a disguised remuneration scheme is in operation.

Back to the payslip.

Holiday pay, pension contributions, and the importance of a match

You'll also see any holiday pay drawn down for that period, either as a lump sum amount or as a weekly “advanced” accrual amount included in your gross taxable pay.

If enrolled in the workplace pension, your employee pension contributions should also be deducted.

Crucially, the “Net pay” on your payslip must match precisely what you receive in one payment into your bank account that pay period.

Recommendation: Be aware that if the amount differs, or if you receive multiple partial payments or payments from different sources, this indicates DR or other trouble!

Be on guard against the two-trick payment scheme

One illegal scheme to watch out for is the "two-trick" disguised remuneration model, where:

1) Your full earnings are not declared to the umbrella company, with the effect your payslip shows a lower “salary” amount.

2) The remaining portion of your earnings is then paid to you separately -- maybe labelled as “options”, “loan” or “annuity” and as “non-taxable.”

These schemes are tax avoidance and could put you at major risk of having to repay huge amounts of back taxes, interest, and penalties pursued by HMRC.

Avoid any confusion; ask if in doubt, and don’t be fobbed off

While umbrella company payslips can look slightly different depending on the payroll software, they should follow the approach outlined above. If anything seems amiss, question it immediately.

Don't let an umbrella company fob you off with confusing techno-jargon. Insist on simple transparency about all deductions and amounts paid. If they refuse to provide clear answers, that's a big red flag to take your business elsewhere.

Finally, protect yourself by only working with fully compliant umbrella companies that provide clear, easy-to-understand payslips showing you're being taxed properly on all your earnings. Don't let anyone mislead you into an illegal tax avoidance scheme that could devastate your financial position further down the road.