Below you’ll find answers to the questions that we get asked the most
What is an umbrella company?
Umbrella companies are businesses that take on agency workers and other types of temporary workers as their own employees with continuous contracts of employment. Their sole purpose is to employ people like you (often called ‘contractors’). To meet the rules to be a ‘continuous’ employment, the umbrella company must usually pay you for 336 hours of work per year at the minimum wage.
TIP: If you have been employed by an umbrella company for more than a year, ask them if any of the 336 hours remain unpaid.
Why have I been told to use an umbrella company?
Historically, if you found work through an agency, they would normally deal with your pay themselves. However these days, agencies prefer not to do this as it saves them time and money and means they can concentrate on matching workers with available work. As such, they usually suggest that people use an umbrella company. It isn’t against the law for them to do this, although when they pass you over to an umbrella company they should make sure they also hand over sufficient funds to cover all the employment costs that the umbrella company will now have. This should include an amount to cover the umbrella company charge (more on this later).
Because the umbrella company becomes your employer, they will deal with your pay and other employer obligations instead of the agency. This includes paying you your wages with tax and National Insurance (NIC) deducted as required by the Pay As You Earn (PAYE) system.
TIP: If you feel very strongly that you want to be paid by the agency and not an umbrella company then you should try talking to the agency. However you should be aware that not all agencies run PAYE schemes them- selves anymore.
What are my employment rights if I use an umbrella company?
You are an employee of the umbrella company and so have the same rights as any other employed person. These include the right to be paid the minimum wage, the right to paid holiday (more on this later), the right to be auto-enrolled into a pension (if you meet the earnings threshold) and to statutory benefits such as sick pay and maternity pay (provided you meet the relevant criteria). You can find more information about employee rights on GOV.UK: https://www.gov.uk/employment-status/employee
It is worth noting that as an agency worker, you would get the main employment rights even if you didn’t work through an umbrella company. Working through an umbrella company can be beneficial in other ways, however. For example, it can provide a continuous payroll link from one assignment to the next, preventing problems like ’emergency’ tax when you start a new assignment through a new agency. Sometimes they also provide things like shopping discounts and an online portal where you can track your pay.
Do the Agency Worker Regulations still apply?
The Agency Workers Regulations (AWR) mean that agency workers should receive equal treatment compared to the end client’s own employees. Umbrella company employees are still classed as agency workers for the purposes of AWR. For example, you should be allowed to use any shared facilities (e.g. a staff canteen or childcare) from the first day you work in an assignment location. After 12 weeks’ continuous employment in the same role, you should get the same terms and conditions as the end client’s own employees, including pay and any annual leave above the minimum 28 days required by law (more on this later). There are rules in place which mean that your assignment can’t just be stopped as you get near 12 weeks of continuous work. You can find out more about AWR on the ACAS website: http://www.acas.org.uk/index.aspx?articleid=1873
Usually you will be given a ‘matched pay’ employment contract by an umbrella company which provides for equal treatment once you’ve been on assignment for 12 weeks (in reality lower-paid workers tend to be on similar packages across the board so you are unlikely to see much difference to your position because of AWR). Some umbrella companies use a special type of employment contract which means that you give up your right to equal pay after 12 weeks but you may get some pay between assignments instead. Sometimes there are problems with these ‘pay between assignments’ contracts as explained by Citizens Advice: https://www.citizensadvice.org.uk/ work/rights-at-work/agency-workers/problems-with-pay-between-assignment-contracts/
TIP: Check with your umbrella company whether you are on a ‘matched pay’ contract.
I heard I can claim some relief on my travel expenses?
It used to be the case that if you worked though an umbrella company then you could claim tax and NIC relief on the costs of getting to and from your assignment locations. However this was essentially due to a legal loophole, that since April 2016 has been closed to anyone working under ‘supervision, direction or control’. This catches many people and it would be very rare for a low-paid worker to now qualify for home to work expenses relief.
However you may still qualify for relief on travel expenses incurred while working (e.g. going to a client meeting), as opposed to getting to work. Where you use your own car for such travel, you may be able to claim tax and NIC free ‘mileage’ from the umbrella company. As the umbrella only has the funds received from the agency to pay you out of, this is unlikely to be paid to you on top of your normal pay, but rather you will be asked to swap some of your normal taxable pay for the tax and NIC free mileage payment-this should still leave you better off.
For any other type of expenses (e.g. train fares) you will have to put in a tax claim to HMRC.
TIP: Be wary of any umbrella companies that say they can still process home to work travel expenses (or indeed, make ANY claims about how they can ‘maximise’ your pay!). While it is the umbrella’s responsibility to ensure that only correct expenses are claimed (and they should ask you questions to ensure this), if they get things wrong, there may be consequences for you.
How will my holiday pay be calculated?
The starting point is that full time workers have the right to a minimum of 28 days’ paid leave including bank holidays (although you could be entitled to more under the Agency Worker Regulations, as explained previously). If you work on a casual basis or very irregular hours, your holiday entitlement will probably be calculated as a percentage of your hours. 28 days is equivalent to 12.07% hours. Example: Mary works 17 hours one week, 20 hours the next week, and then 15 hours for next two weeks. After a month of working, she has built up entitlement to approximately 8 hours of paid leave (67 hours x 12.07%).
Many umbrella companies offer to include an amount for holiday pay in your wages on an ongoing basis (a system known as ‘rolled up’ holiday pay). Strictly this is incorrect, as the law says that it should be paid out at the time annual leave is taken, but many workers prefer the ‘rolled up’ system.
If you are not on a rolled up system and you leave the employment having taken fewer holidays than you are entitled to, you should be paid in lieu of the untaken holiday. So carrying on Mary’s example, if her employment ended before she could take the leave she had built up, she would be entitled to be paid in place of taking the leave. If she usually earned £8 an hour, she would be entitled to £64 (holiday pay is calculated based on your average pay rate in the preceding 12 weeks including bonuses, overtime, commission where relevant). There is lots of information about holiday pay on the GOV.UK website: https://www.gov.uk/holiday-entitlement-rights.
TIP: Check how the umbrella company will deal with your holiday pay – if it is not on a ‘rolled up’ basis ask them to confirm that all outstanding holiday pay will be paid to you with your final payment.
How much will I be paid if I work through an umbrella company?
This is where things can get quite complex – so much so, that people often think they are being ‘scammed’ by an umbrella company when they get their first payslip. But let us explain once and for all how things should work.
If you are paid by an agency directly, then the rate they offer you (commonly known as the PAYE rate) is the amount, before your tax and NIC, that you should receive. So if you have a PAYE rate of say, £9.50 per hour and work 35 hours you will be paid £9.50 x 35 = £332.50 as gross taxable pay. You will then have your PAYE tax and employee NIC deducted from this, in the same way as all other employees. But £9.50 is not the true cost to the agency of paying you. In addition, they may have to pay things like employers’ NIC, holiday pay, apprenticeship levy and contributions into a workplace pension. As such, the cost to them of taking you on may be something more like £12 an hour. But you aren’t entitled to be paid the full amount of £12 -you are only entitled to the £9.50. Hopefully you are familiar with this concept from any other employments you have been in.
When an agency hands you over to an umbrella company, they should pass the umbrella company the full costs of your employment – i.e. the £12 an hour (from the funds they themselves have received from the end client). This is commonly known as the limited company rate. They may explain to you that you can get £9.50 an hour if you are paid through them, or £12 an hour if you are paid through an umbrella company. The ‘headline’ rate of £12 an hour can sound like a great deal if the agency do not properly explain to you that it is intended to cover the total costs of employment and is not the amount you are going to personally earn! As such it can be very tempting to go with the £12 an hour – but you may then get a shock when you get your payslip and see things like employer NIC being deducted.
The bottom line however is that the limited company rate should be sufficiently more than the PAYE rate, so that once all the additional employment costs have been deducted, and the umbrella company charge has been deducted, you are in no worse a position than if you had just received the PAYE rate in the first place. This can be very hard to work out unless you are a tax expert or have some special computer software to do the maths for you, so to help you we have prepared a table (over the page) that shows, approximately, what the minimum equivalent limited company rate should be for some common PAYE rates.
TIP: Ask your agency for both their PAYE rate and limited company rate when looking at a potential assignment.
PAYE rate v Limited company rate – Ready reckoner
Limited company rate
Please note that this is just a ‘ready reckoner’ but should help you understand whether what you are being offered to work through an umbrella company is roughly right. For the purposes of this table, we have assumed that a worker is working 35 hours per week and that the umbrella is making a £20 ‘margin’ a week (i.e. the charge for their services). This margin should be factored into the limited company rate – if the umbrella company charges more, the equivalent rate will be slightly higher and if they charge less the equivalent rate will be slightly lower.
This table is based on the 2018/19 rates and allowances for things like employer’s NIC and auto-enrolment. For anyone with a technical interest in the figures, they can be found on GOV.UK, for example here: https:// www.gov.uk/guidance/rates-and-thresholds-for-employers-2018-to-2019
TIP: If your circumstances do not fit neatly within this table then give the umbrella company the PAYE rate and the limited company rate you have been quoted by the agency. A good umbrella company should help you understand what the rates mean and which one works out best for you.
Henry sees a job advertised through an agency, paying £8 an hour. He gets the job but the agency then tells him that he should find an umbrella company to work for. Using the table above, Henry knows that he needs to be offered a rate of about £10.20 to work through an umbrella company. When Henry gets his first payslip, he can see that the £10.20 rate offered to him, has resulted in him getting paid roughly the same amount as if he was paid £8 an hour from the agency (£357 less Company Deductions = £281.28 and 35 hours multiplied by £8 an hour = £280).
Saying that, Henry is a bit confused as to why his pay contains a salary element and a bonus element. The umbrella company explains that it is to protect them should they not be paid by the agency. In such cases they have to pay you out of their own pocket – but by structuring your pay like this, this only needs to be for the salary amount.
TIP: If you are not sure what your payslips mean – ask! It will be important to a good umbrella company that you have 100% peace of mind and they won’t mind you asking questions.
What is CIS?
Under the Construction Industry Scheme (CIS), contractors deduct money from a subcontractor’s payments and pass it to HM Revenue and Customs (HMRC).
Contractors must register for the scheme. Subcontractors don’t have to register, but deductions are taken from their payments at a higher rate if they’re not registered.
Who counts as a contractor or subcontractor?
Register as a contractor if either:
• you pay subcontractors for construction work
• your business doesn’t do construction work, but you spend an average of more than £1 million a year on construction in any 3-year period
Register as a subcontractor if you do construction work for a contractor.
Work covered by CIS
CIS covers most construction work to:
• a permanent or temporary building or structure
• civil engineering work like roads and bridges
For the purpose of CIS, construction work includes:
• preparing the site, e.g. laying foundations and providing access works
• demolition and dismantling
• building work
• alterations, repairs and decorating
• installing systems for heating, lighting, power, water and ventilation
• cleaning the inside of buildings after construction work
When we pay you under CIS, we’ll normally make deductions at the standard rate of 20%.
We will make deductions at a higher rate of 30% if:
• you are not registered for CIS
• we cannot verify you
• you give the wrong name for your business
Gross payment status
You can apply for gross payment status when you register for CIS. This means we will not make deductions from your payments and you’ll pay all your tax and National Insurance at the end of the tax year.
When and how do I pay National Insurance?
Class 2 and class 4 National Insurance contributions are calculated and paid through Self-Assessment.
Payment is due on the 31st of January, which is also the deadline for submitting your Self-Assessment tax returns.
Through the CIS scheme, 20% will be deducted from your payments before payment is made to you (this is 30% if you’re unregistered). These deductions function as an advance payment against your income tax and NICs. Once your self-assessment tax return has been calculated and submitted, you will either have an additional payment to make, or you’ll receive a refund.
What is Joint Employment?
Joint Employment is a way of a provider working with a recruitment company where both parties employ the worker jointly. There are very specific processes required to make this work properly as well as a different range of contracts.
What are the benefits of Joint Employment?
The benefit is that where genuine joint employment exists there is no VAT chargeable on the cost of employment. HMRC confirms this within their guidance relating to Supply of staff and staff bureaux (VAT Notice 700/34).
Who can benefit from Joint Employment?
Joint Employment can be a more cost-effective option to recruitment agencies than a traditional Umbrella solution. Joint Employment works across a range of sectors but offers significant commercial benefits to industries including healthcare and medical, charities, banking and financial services.
Supervision, Direction, Control
It was announced in the 2016 Budget that those working through an umbrella company (or similar intermediary), and who are subject to Supervision, Direction or Control (SDC), will no longer be able to claim Travel and Subsistence expenses from 6th April.
How is SDC defined?
1. ‘Supervision’ means the extent to which the client oversees a person doing work and how they perform it to a standard they have specified.
2. ‘Direction’ means the client directing how the worker completes their assignment, by providing instructions, guidance and advice as to how the work is to be done. Someone providing direction will often coordinate how the work is done as it progresses.
3. ‘Control’ is where a worker has someone dictating the work they do and how they go about doing it. This also includes the power to move the worker from task to task as priorities change.
What will HMRC base their judgements on?
There are two main ways for HMRC to apply the SDC test:
• Documentary evidence, such as contracts and terms of engagement. Establishing what has contractually been agreed.
• The ways in which the work was actually performed – the ‘working practices’ followed. They’ll gather facts from anyone involved in the contract arrangements, including the worker, client and agency.
Don’t just take our word for it, here are just a few of the comments we’ve received so far
Elevate is a fantastic payroll service, knowledgeable, helpful, professional, and efficient. As an agency worker I have had dealings with many payroll companies and elevate is by far the best and I have never had a problem, would recommend to everyone and I will only continue to use Elevate as there is never any hassle.D. Andrews
I have been with Elevate for some time now, and I have always been paid on time. I have never had any problems at all, and they have been amazing whilst going through the difficult time of Covid-19. I can’t thank them enough.S. Wells
Elevate payroll are extremely professional and when any problem is found they are personal and help until a good conclusion, they were my preferred payroll company whilst I was working in Swindon on an office refurbishment.M. Lock
I would recommend elevate to anyone around Wiltshire/Swindon area and I would like to be paid by them again in the future
Professional and personal at the same time; fantastic.
I approached Daniel at Elevate to help me payroll a good size cohort of contractors. Daniel was always super helpful; thinking outside the box and coming up with ideas to support not just the contactors but for me as well. Daniel is always upfront; honest; flexible and above all, put my contractors at the forefront by always working hard to ensure they were paid on time or even early in most cases which always went down really well with the guys thus creating a better working environment. The team at Elevate have been readily available for any urgent queries and have been able to offer some great guidance. My contractors have valued being with Elevate and all of them hope to be able to stay with Elevate moving forward.Operations Director
I would go nowhere else to payroll now. I have been approached by many for the business; and its clear to me that Daniel will not only work over and above to maintain excellent customer/client services but will do so with the upmost integrity.
We genuinely feel like a partnership has been formed and wish all the best to Elevate and the team.