Contractors receiving their first umbrella company payslip can sometimes find it challenging to understand how their pay has been calculated and what deductions have been made. This guide explains how an umbrella company payslip is generated and the tax deductions you can expect to see.
Example Payslip
Below is an example umbrella company payslip. If you scroll down, you’ll see annotations that explain each deduction individually.
Employment Costs
When you register with your chosen umbrella company, the umbrella company becomes your employer. By law, all employers in the UK must pay Employers National Insurance Contributions (NICs) on the salary paid to their employees, along with the apprenticeship Levy, employers pension contributions and holiday pay.
Deductions taken from the Assignment Rate
The client you work for will pay your recruitment agency for the work you have done. Your agency will then pay the assignment rate to your umbrella company – which in the case of the example payslip, is £1,200. The assignment rate is different to the rate you are due to be paid (your gross pay rate) because of the additional employment costs for the umbrella company, which include:
- Employers NI – £119.37 (13.8%)
- Employers pension contributions – £25.41 (3%)
- Holiday pay – £111.47 (12.07%)
- Apprenticeship Levy – £5.18 (0.5%)
Compliant umbrella companies will only ever use the money for the assignment rate to cover the employment costs, and these deductions will never be taken from your gross pay rate.
Every umbrella company will also retain a margin in return for the services they provide. This is the only thing that will differ between providers, so it’s worth looking at how much each provider retains before choosing who to use. That being said, it is just as if not more important to look at whether the umbrella company holds an FCSA or Professional Passport accreditation and the quality of service you will receive.
Deductions taken from your Gross Pay Rate
The rate you are due to be paid is referred to as the contract rate or gross pay rate – which in the case of the example payslip is £1,035.05. The gross pay rate will consist of your hourly rate at National Minimum Wage (NMW), plus another taxable amount referred to as the additional taxable pay. It is a legal requirement for umbrella companies to show that they are paying you at least the NMW, which is why it is displayed like this on your payslip.
The umbrella company will deduct two amounts for PAYE Income Tax and Employee NICs from the gross pay rate. These deductions will be paid to HMRC on your behalf. The remaining £742.38 is your net pay, and this will be paid into your bank account.
Health and Social Care Levy
The government has confirmed a temporary 1.25% increase to both the main and additional rates of Class 1, Class 1A, Class 1B and Class 4 National Insurance Contributions (NICs) for the 2022 to 2023 tax year. The revenue raised will be used t support the NHS and equivalent bodies across the UK.
From April 2023 onwards, the NIC rates will decrease back to the 2021/22 tax year rates and will be replaced by a new 1.25% Heath and Social Care Levy where the revenue will support UK health and social care bodies.
Holiday Pay
Every employee in the UK is entitled to 5.6 weeks paid holiday per year. For an individual who works a typical 5-day week, 5.6 weeks’ holiday equates to 28 days (5.6 x 5). However, as the legislation defines holiday entitlement in terms of weeks, it raises a problem for temporary workers who tend to work various hours and days depending on their assignment, making it difficult to determine what a week’s holiday would constitute. As temporary workers are most likely to take on numerous positions throughout the year, it is also difficult to know at the start of the holiday year what their entitlement for the year will be and how much holiday pay they should receive.
To ensure temporary workers are receiving their full holiday pay entitlement, employers of temporary workers have adopted the following calculation to work out their employee’s holiday pay:
The calculation assumes that the employee will be working during all weeks in the year which aren’t designated holiday weeks (52 weeks – 5.6 weeks holiday entitlement = 46.4 working weeks). The 5.6 weeks holiday entitlement divided across the 46.4 working weeks means that the employee will accrue 12.07% of their total annual holiday entitlement for each week worked. Your holiday pay is then worked out by taking a percentage of your earnings (12.07%) and re-allocating it as holiday pay.
Umbrella companies will give you the option to decide whether you would like to have your holiday pay paid in advance or accrued. If you choose to have it advanced, the 12.07% will be paid to you alongside your salary payments – as outlined in the example payslip. If you opt to have it accrued, the umbrella company will withhold the 12.07% and pay it into a separate holiday pot that you can draw from later. For example, if you have planned time off or a holiday coming up.
For more information about annual leave and holiday pay for umbrella employees, please visit the FCSA’s website.
Workplace Pension Scheme
When contracting through an umbrella company, they’re legally required to provide and enrol you onto a workplace pension scheme. After 12 weeks of employment, you will be enrolled, and pension deductions will begin. The minimum contribution set by the government that you and your employer can pay into your pension is 8% – this is usually split into 5% employee and 3% employer.
If you have an existing pension provider in place or do not want to use the pension scheme offered by the umbrella company, you can opt out. To opt-out, you should contact the pension provider and notify them of your decision.
Salary Sacrifice
Salary sacrifice is an agreement to reduce your salary in return for a non-cash benefit, such as increased pension contributions. Salary sacrifice is particularly beneficial if you would like to make more significant contributions towards your pension or have an existing pension scheme in place you would like to continue using.
When you agree to a salary sacrifice arrangement, your pay is reduced by a set amount or percentage of your pay. As your earnings have been reduced, this also reduces the amount of tax and NICs that are due. The amount you sacrifice to your pension is also not subject to NICs or tax deductions.
Not all umbrella companies will offer salary sacrifice due to the challenges faced when integrating it into their existing payroll. If you are interested in salary sacrifice, always check before registering with your chosen umbrella company that it is a service they offer.
It is important to note that even if you have enrolled on a salary sacrifice scheme, it is still a legal requirement for the umbrella company to enrol you onto a workplace pension scheme. Therefore, if you do not want to use the workplace pension scheme, you must opt-out.
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