Guidance: Working through an umbrella company

How an umbrella company works

An umbrella company is a business often used by recruitment agencies to pay temporary workers.

In most cases, the umbrella company employs you and pays your wages through PAYE. It does not find temporary work for you, this is done by the recruitment agency (also known as an ‘employment business’).

Although the umbrella company is your employer and will pay you, the work you carry out will be for one of the recruitment agency’s clients. This work is often on a short-term basis.

The first time you contact a recruitment agency the steps to set up temporary work and employ you begin. The process may involve:

• a client — the business that needs temporary workers
• a recruitment agency — that finds temporary workers for a client
• an umbrella company — your employer for temporary work from that recruitment agency
• you (the worker) — who contacts the agency about temporary work

Each plays a role in the supply chain and has a contract for the temporary work but with different responsibilities. The supply chain often works in the following way.

The client needs temporary workers

The client is the business that needs temporary workers. It sets up a contract with a recruitment agency to find and engage temporary workers.

The recruitment agency searches for workers

The agency finds a suitable candidate from its contacts or advertises the role, stating the pay rate (weekly, daily, or hourly). You may not get paid this rate, because it usually includes the umbrella company’s operating costs.

Some clients may assess whether the off-payroll working rules apply to the role. These rules apply where workers contract though their own limited company. The online check employment status for tax tool can help them assess this.

If the client decides that off-payroll working rules would apply to the role, the job advert may describe it as being ‘inside IR35’. This means the client (or recruitment agency) may ask you to be employed through an umbrella company.

You become an umbrella company employee

Before the recruitment agency can offer you a temporary role (assignment) they may ask you to be employed by one of their preferred umbrella companies. You may be able to choose your own.

The agency must give you a key information document which should include:

• the umbrella company for all temporary work from this agency
• the minimum assignment rate paid to the umbrella company
• what the umbrella company will deduct
• your minimum gross pay

The recruitment agency agrees terms with the umbrella company

The agency sets up a contract with the umbrella company. This outlines that the umbrella company is responsible for:

• employing you and paying your wages in line with the key information document
• invoicing the agency for the time you’ve worked

The recruitment agency discusses the role with you

For each new temporary role, the recruitment agency must give you new assignment details to confirm:

• who you’re working for
• your job title
• what you’re going to do
• the notice period to end the assignment
• where you’ll work
• any health and safety issues (for example if you need personal protective equipment)

Your employment rights

As an employee of an umbrella company, you have the same employment rights as other employees.

You have a right to a written employment contract. A guide on Employment contracts on www.acas.org explains how they work and what must be written in them.

You have the right to be paid at least the National Minimum Wage or National Living Wage, on time and in full at the agreed intervals as set out in the key information document.

Holiday entitlement

You are entitled to paid holidays. Your holiday pay will be deducted from the assignment rate for your job and then paid back to you when you take holiday and claim paid leave.

How you get paid

When you send your timesheet to the recruitment agency, it charges the client.

The recruitment agency then pays the umbrella company the agreed rate. This should be the assignment rate multiplied by the time you have worked.

The umbrella company is responsible for paying you as your employer. It must pay you the gross pay for each role. This may be outlined in the assignment details from the recruitment agency.

Some umbrella companies may choose to pay the National Minimum Wage rate for all hours worked and then make up your full rate with an additional payment, like a bonus. You must still pay tax on this additional payment and your payslip must show this and all the hours you’ve worked.

Understanding how your gross pay is calculated

You have a right to a payslip that shows your pay.

You may also receive a ‘reconciliation statement’ from the umbrella company which shows you how your gross pay is worked out from the assignment rate.

How an umbrella company works out your gross pay from the assignment rate

The recruitment agency pays the umbrella company the assignment rate, then the umbrella company makes several deductions to work out your gross pay.

The reconciliation statement shows the breakdown of these deductions. You should normally see the following deductions on the statement:

• umbrella company operating costs (sometimes called ‘margin’)
• employer National Insurance contribution
• employer workplace pension contribution
• holiday pay
• Apprenticeship Levy (if applicable)

The amount after these deductions have been taken off is your gross pay.

If you do not understand the deductions, or if you are not given a breakdown of them, you should speak to your umbrella company.

Checking your payslip

Your umbrella company will then deduct the following from your gross pay:

• Income Tax
• employee National Insurance contributions
• employee workplace pension contribution
• student loan repayments (if applicable)
• other deductions you have agreed to, such as a discounted gym membership

Your pay after these deductions is your take home pay (also known as ‘net pay’).

The National Insurance and pension contributions taken off your gross pay should always be employee contributions, not employer.

If your gross pay is less than the rate of pay on the assignment details given by the recruitment agency, you should speak to your umbrella company first to try to sort out the problem.

If you think deductions for Income Tax and National Insurance from your gross pay are incorrect, you can estimate your Income Tax for the current year.

You can check payslip examples to see what a payslip should look like.

If your pay is not what you expected

If you have been promised higher pay by your umbrella company

You are responsible for paying the correct amount of tax and National Insurance, even if you are employed.

Some umbrella companies promote tax avoidance which involves bending the rules of the tax system to pay less tax.

What to look out for

Your umbrella company could be involving you in a tax avoidance scheme if you get:

• a separate payment which you are told is not taxable, such as a loan
• more money paid into your bank account than is shown on your payslip
• a payment from someone other than your umbrella company, which has not been taxed
• asked to sign another agreement in addition to your employment contract

You can find out what to look for on your payslips.

Find out about tax avoidance arrangements used by some umbrella companies.

If you’re concerned you may be involved in tax avoidance

If the umbrella company makes you an offer that sounds too good to be true, take time to consider it and ask for full details. Find out more by reading personal stories from those who have been caught up in tax avoidance schemes.

You can check if you may be involved in a tax avoidance scheme by using the online risk checker tool. This tool will tell you how to report the umbrella company and get help to sort out your tax.

Get help with your pay and rights

You should discuss your pay and employment rights with your umbrella company first.

If you still have concerns after this you can contact:

ACAS provide free and impartial advice to employers, employees and their representatives on their rights and obligations.