Contractors' Questions: Is my umbrella company ripping me off?

Contractor’s Question: My gross pay from my umbrella company is much less than my agency pays to the company. The umbrella’s payslip is not clear to me, and its margin is marked as £26 a week but still, every gross pay is smaller by some £140!

Is my umbrella company cheating me or is there a reasonable explanation to the above? If there’s not a reasonable explanation, I’d be inclined to pursue the company for the monies I suspect are owed. That might be hard however, as there’s no clear information in my contract or supporting documents about how the company’s margin is calculated.

Expert’s Answer: Firstly, let’s establish the following. Your umbrella company will have a contract with the agency for your services. And although you are suffering from a lack of financial detail, it appears that you are aware of the contract rate i.e. your gross figure, that is shown in that contract.

From this point in my answer onwards, I will continue to comment on the basis of how a compliant umbrella company should operate, in which case it should be made very clear that the “gross” figure you quote, is deemed to be your contract rate and not your salary.

Unfortunately, this is one of the most common misunderstandings that first time-contractors have when they choose to operate through an umbrella. So in fact, your contract rate is deemed to pay the employer’s NICs and the margin, before your taxable salary is calculated.

The typical follow-up question is, so why am I – the employee - paying the employer’s NI? Well, all umbrella companies, as employers, have a legal obligation to pay employer's National Insurance Contributions to HMRC. These contributions are made from the funds received from the recruitment agency/client with whom the umbrella company will have a business-to-business contract; they will also deduct their margin from the contract value. You will work with the umbrella company under an over-arching contract of employment and your salary will be subject to income tax and employee's NICs. Your salary is calculated as the contract value, less the umbrella company's margin, less the amount payable to HMRC for employer's NI.

Without seeing your contract of employment with the umbrella company and/or your payslip, it is difficult to give you definitive advice on your circumstances. However, you should note that any reputable umbrella company should be able to give you a detailed account of how the rate of pay shown in the contract has been applied. So I recommend that you ask your umbrella company to give you a detailed analysis, so you’ll know exactly how their margin and your net pay has been calculated. If the umbrella can’t or won’t, then it may be worth strongly considering engaging someone who can ensure you know exactly how your pay and their margin works, assuming, of course, that you wish to stay with your current employer.

The expert was ‘Roger, the retired taxman,’ an adviser to trade body All Umbrella Companies Are Equal.

Tuesday 29th March 2016