You’ve been asked to use an umbrella company, but one aspect that can be confusing is how an umbrella company calculates the salary payment you get at the end of each week or month.
When you’re an employee of a company, the employer offers you an annual or hourly rate and calculates and deducts your tax and NI from that and you receive what’s left. When you work through an umbrella company as an agency worker/contractor, the process works a little differently.
As a contractor, you accept an assignment for an end client but they do not pay you directly as their employee. There is usually a chain of companies involved in your assignment which the money has to travel through before it reaches you. It is important to understand how the chain works in order to understand what is happening with the money you are earning.
Whis is the workplace, the company has a temporary assignment they need a worker for and usually, they engage a recruitment agency to find and provide a worker for an agreed fee.
When used by the end client, the recruitment agency is the company that matches the contractor to the assignment(s) they currently have and negotiates the contract details with the end client (on the contractor’s behalf). While some recruitment agencies choose to employ a temporary contractor on their own payroll, many offer the option to use an intermediary party (which is usually an umbrella company) instead. In this relationship, the liability for all employment-related costs and responsibility is passed to the Umbrella Company.
Employs the contractor and takes on all liability for all the employment-related costs and responsibilities. They have the responsibility to deduct the relevant tax and NI contributions from your basic rate and pay these over to the HMRC through Real-Time Reporting. As a contractor using an umbrella company is beneficial because it allows you to have one employer but undertake multiple assignments offered by multiple agencies. You also have the benefit of being employed and accruing employment benefits such as statutory sick pay and maternity leave etc.
When an agency negotiates the assignment rate charged to the end-client, the rate should factor in the following deductions:
And still provide a basic salary rate equivalent to that of a permanent colleague at the end client doing the same role once those deductions have been taken. It is because of these deductions you may often hear an assignment rate called an ‘umbrella’, ‘charge out’ or ‘limited’ rate and you may also be told these rates include an ‘uplift’.
While as a contractor, you may expect to receive the rate quoted for an assignment, however, the reality of the situation is that employment costs must be taken into consideration first.
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