Umbrella company payslips: here’s what every contractor must see

At long last HMRC has issued payslip guidance to contractors who are working via an umbrella company, which is all well said and done, but in reality, we all know that Revenue guidance doesn’t make for the easiest of bedtime reads, writes Lucy Smith, managing director of Clarity Umbrella.

So let’s look at what you SHOULD be receiving from the umbrella company.

A payslip should only hold the taxable salary or “gross pay” for the contractor, with any other elements clearly broken down – that’s itemised -- on a separate document that usually gets called a ‘statement’ or ‘summary.’ And this is usually the easiest document to follow the deductions through on.

The critical thing to understand when working via an umbrella company is the “rate” you are being offered by the agency or end client, and to categorically make sure that you are happy with this rate before you go signing any contracts!

Assignment rate: definition and explanation

The advertisement for any contract role should be very clear about two things.

One; the IR35 status (so you have an idea as to whether this is going to be a role for you or not), and two -- the “assignment rate” that is being offered. If  the assignment rate isn’t spelt out, then ask before you go any further.

The “assignment rate” is the amount that is invoiced out to the agency for your days worked, and in turn, is the monies the umbrella company receive.

What comes out of the assignment rate?

From that rate, the employment costs must be met; and this includes Employer National Insurance, Apprenticeship Levy, Employer Pension and the umbrella company’s margin. These should each be clearly identifiable on any illustration, and if it isn’t, then go back and ask that they make each one clearly identifiable!

What remains after these deductions, is the available “taxable” or “gross salary” which will be the element which pulls through to the payslip for you.

We see many (many!) contractors claiming they are paying the employment costs. But under the way that an umbrella is structured, this is met from the income (invoice) value received, and is not taken from the contractor’s gross pay.

If we think differently or even just logically about this, there is only one ‘pot of money’ that the umbrella receives, and all costs need to be met from this pot, with a small proportion being taken by the umbrella, and as much as it would be nice for a money tree to cover these, unfortunately that is not the case! 

So what are the options for umbrella contractors?

In a nutshell, understand the rate being offered -- and this is generally with a decent open and honest conversation with the umbrella.

Next, determine if this becomes a worthwhile contract for you and make the decision on this basis – armed fully with the deductions that are going to come from the agreed rate.

Some hopefully useful context to consider -- over the last three years, we have seen a definite increase in IT contractor day rates for those working under an umbrella, which fall in line with the changes to IR35 in the private sector.

So quite possibly end-clients have tried to take a certain amount of the reform’s impact into consideration. We have even worked with recruitment agencies to calculate increased rates, to cover the additional employment costs that may not have been seen operating via a PSC.

IR35 and other tax considerations

Of course, inside IR35 assignments may not be the right move for some. But for others, believe it or not, they have been working in this way for 20 years, way before those end-client IR35 status determinations as they stand now.

Currently, we’d say that for many individuals of the IT world under employment, they are likely to be 40% rate tax payers, and therefore a rule of thumb says you are likely to take home anything between 52 and 58% of the agreed “assignment rate” into your bank account (excluding any pension considerations).

Finally, a bit more talk…

If you speak with a well-versed umbrella, they may be able to help offer advice on the impact of any earnings or dividends through the PSC while on the umbrella assignment, and whether looking at pension options could not only help reduce some tax and NI but also help you understand the impact of 40% PAYE earnings on your potential dividend taxes too.

My final top tip? Pick an umbrella that can advise thoroughly and make sure you are comfortable with the rate!

Wednesday 30th Nov 2022
Profile picture for user Lucy Smith

Written by Lucy Smith

Lucy has over 9 years extensive experience in the umbrella market, much of this time spent managing one of the most reputable umbrella companies in the market and now, Clarity Umbrella.
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