How umbrella company contractors can understand their payslip
If you're a contractor working for an umbrella company, you have the advantage of having someone else look after things like your National Insurance obligations, income tax, and expenses, leaving you free to focus on your current project or assignment.
But it’s not entirely hands-off from your perspective, as all umbrella company employees receive a weekly or monthly payslip, just like a permanent employee, and understanding your payslip as a brolly contractor is crucial, writes Joanne Harris, head of technical, compliance and payroll at Parasol Group.
Umbrella company payslip: intro
A contractor working through an umbrella company will also receive an invoice reconciliation with their payslip, clearly showing all deductions from invoice value to net pay. Outlined correctly, this offers full transparency of how your net pay has been calculated and helps you to ensure you’re receiving everything you’re entitled to.
But be aware, umbrella company payslips differ from a standard employee payslip. And given that on your umbrella’s payday, you will also receive the invoice reconciliation, umbrella pay documents can appear confusing at first glance. They to unlocking the transparency that this is intended to achieve, is to take time to understand all of the deductions made, before your final net pay figure is presented to you.
Your umbrella company payslip should include all your personal details, such as your name, pay date, employee number and National Insurance number.
Your tax code should also be clearly displayed. The standard tax code for 2021/22 is ‘1257L,’ which is reflective of the standard personal allowance of £12,570.
The tax code used in calculating your net pay will be the one supplied to the umbrella company on your P45, or arrived at as the result of you completing a ‘new starter’ checklist. It could also be updated on receipt of a P6 coding notice sent directly to your umbrella employer from HMRC.
If you believe your tax code is incorrect, you will need to contact HMRC directly to ask them to send an updated tax code to your employer via a P6 coding notice. Fortunately, your payslip should contain all the necessary details for you to do this.
The main difference between an umbrella employee payslip versus a standard employee payslip comes in the form of the additional document that you will receive on your payday – the invoice reconciliation. This document simply breaks down the deductions taken from the invoice value.
This invoice reconciliation should detail the invoice totals relating to the end-client, the timesheet it refers to, and the total deductions taken from the invoice before arriving at the gross pay figure.
The intent is that contractors have visibility of the invoices raised to the agency or end-client, as well as the timesheet details, the total number of hours worked, and the invoice values.
What your invoice reconciliation should contain
Before presenting you with your gross taxable pay, it will also detail a number of statutory and non-statutory deductions, such as the umbrella company’s margin. This margin is the only deduction retained by the umbrella company, with all other deductions made on behalf of either HMRC or your pensions provider (where applicable).
Employment cost deductions will also be spelt out here. This includes National Insurance contributions, which is calculated at 13.8% above the threshold, and the Apprenticeship Levy which (where applicable), is calculated at a flat rate of 0.5% of the gross pay figure. Both deductions are paid to HMRC.
Any expenses, such as mileage claimed by you will be outlined here also.
Other deductions may include employers pension contributions (both auto-enrolment and private). This will then culminate in your final, taxable gross pay figure which is subject to the usual PAYE tax and National Insurance deductions.
If your umbrella company withholds holiday pay from this invoice value, to be paid when you take holidays, this should be flagged up here also.
Once you have an insight into the summary of the deductions, you will then see how your gross pay is impacted by tax and other contributions.
- Basic pay
Most umbrella companies will pay you ‘basic pay,’ which is calculated according to the total hours worked, multiplied by the National Living Wage hourly rate. This will be included on your payslip for the period in question as well as the year-to-date calculation.
For most umbrella employees, the remainder of your pay will appear as either ‘commission’ or ‘bonus.’ This remainder is anything that you earn that is above the basic rate of pay, and will be included with the other pay elements to form your gross taxable pay.
- Holiday pay
If your holiday pay is paid to you in advance, you need to see a line on your payslip that shows Holiday Pay each time you are paid. Again, this will be included with basic pay and commission/bonus, to form your gross taxable pay.
If your umbrella company withholds your holiday pay and pays this out when you take annual leave, this should be clearly displayed on your payslip, so you know how much holiday pay you are entitled to.
As with a standard employee payslip, you will also find details of any deduction for the period, for National Insurance, PAYE income tax and employee pension deductions.
Any other contributions such as child support payments or student loan repayments will also be detailed here.
- Net pay
After all these deductions, you will then finally be left with your net pay! This, combined with any expenses owing to you, will be paid into your bank account on your umbrella’s scheduled payment date.
Now you can better navigate your payslip from your umbrella company, you are a big step closer to working smoothly through your chosen provider. But for anything that crops up on your payslip which we didn’t cover, or that you still want to understand about umbrella company operations generally, reach out to us via the Contractors’ Questions page so ContractorUK can put your queries to us