Despite the current circumstances, our teams remain here to support you.
We're available by phone, email or via our website so get in touch, stay connected and let's get safely back to work together.

Advice, news, debate
and discussion
all in one place

Going Under An Umbrella? Costs and Considerations When Going Inside IR35

Image source

As you are probably aware, several changes to IR35 legislation came into effect in April this year (2021) that impacted the private and public sectors. These changes for many contractors placed the responsibility of deciding if contracts were inside IR35 on the shoulders of the end client, rather than the contractor themselves. Consequently, contracts that may have previously been outside IR35 have now moved inside.

The easiest way for some contractors to comply with these new IR35 updates was to start working under what is called an umbrella company. However, this change proved somewhat confusing for several contractors, especially when it comes to the costs and taxation adjustments in working with an umbrella company instead of as a limited company or sole trader.

To clear up this confusion, we have created this blog to outline what an umbrella company is and how they operate in terms of structure and costs.

 

What Is An Umbrella Company?

An umbrella company is an organisation that acts as an intermediary between the contractor and recruitment agency (such as Zebra People) and/or the end client. It employs contractors working on fixed-term contracts and takes the responsibility of paying tax away from the contractor.

When you work within IR35 with an umbrella company, the accountancy, administration, and taxation are handled by the umbrella company and not the contractor. Due to this, contractors that work with umbrella companies do not have the typical financial responsibilities of running a limited company.  The umbrella company manages payroll by collecting payment for the work completed from the recruitment agency or end client and pays the contractor through PAYE.

This means all taxes, National Insurance contributions and pension payments, and any other costs are deducted at source before reaching the contractor.

As such, the payment that the contractor receives each month when working with an umbrella company is the net pay and not the gross.

 

Breakdown Of Costs Working With An Umbrella Company

The advantages of working with an umbrella company are clear in that you do not have to worry about calculating your taxes, NI or pension contributions or any other financial costs, as the umbrella company will handle them for you. In addition, you can be sure that you are working lawfully by adhering to the IR35 legislation.

However, it is important to understand the various costs associated with working through one of these organisations. These are explained below:

  • Umbrella companies will charge a fee in the form of a fixed rate or a percentage of earnings to use the service- this is how they make their money. Most contractors prefer those umbrellas that charge fixed rate fees, as they can work out cheaper.
  • As an employer, an umbrella company must pay an extra portion of National Insurance – called Employer’s National Insurance.
  • Larger companies must also pay the government’s Apprenticeship Levy (an extra tax to fund apprenticeships).
  • Your gross pay will then be subject to employee’s PAYE (which will vary according to your HMRC tax code) and national insurance before arriving at your Net or Take-Home Pay.

Note: It is a legal requirement to pay both Employer’s NI (13.8% of the Umbrella or “Uplifted Contract Rate”) and the Apprenticeship Levy (0.05%).

 

How You Are Paid Under An Umbrella Company

You “as the contractor” work for the umbrella company; when the final client pays the recruitment company, they do so at an uplifted rate in comparison to how they would usually when operating directly with the contractor.

The recruitment company then pays the umbrella, which in turn pays the contractor. This uplifted or ‘umbrella’ rate is paid to cover the fees and expenses of the umbrella company.

When the umbrella company receives payment from the client, they deduct their costs which include:

  • Their fee
  • The employer’s NI contribution (13.8%)
  • The Apprenticeship Levy (0.05%)
  • The employer’s pension contributions (optional)

Next, the umbrella company deducts your costs; these include:

  • Employee NI Contributions
  • PAYE Tax (at your tax code rate)
  • Holiday Pay (12.07%)
  • Pension provision (optional)

What is left over is your NET or Take Home Pay

 

Wrapping Up

It is essential to do your due diligence and calculate the various costs levelled on your gross pay per month to get a good picture of whether working under an umbrella company is a good option for you.

You will find that many umbrella companies will offer you a calculator that considers each cost to see how much you will take home – take advantage of these. However, do make sure that you check precisely what assumptions they have used to arrive at the figure.

Here at Zebra People, we only work with FCSA regulated umbrella companies; these companies operate using the HMRC PAYE scheme and are regularly assessed and audited to ensure that they continue to operate at the highest possible standards.

It is important to understand the pros and cons of working under an umbrella company and appreciate that not all of these companies are equal. As such, it is worth investigating which one will provide the best service for you at a reasonable rate.

We hope that this article has made working for an umbrella company clearer.

 

If you are looking for new candidates for your team or looking to be placed into a fantastic new role, contact Zebra People at [email protected] or ring our London-based office on 020 7729 4771.

Leave a reply

Leave a Reply

Latest views

Image Source So, you have decided that transitioning to a flexible working schedule would be a good fit for you. Maybe this is because your family circumstances have changed, and you need time in the morning to drop off your kids at school. Or perhaps your optimum hours of inspiration and productivity don’t coincide with your current […]

Remote working used to be an option offered only by a minority of workplaces. However, ever since the pandemic changed the way businesses must operate, pivoting to a remote working model has become a necessary adaption for companies across industries to attract and retain talent. In changing to a hybrid or completely remote working model, […]

Maybe this is your first UX interview ever, or you haven’t interviewed in a few years and you want to get a better idea of what to expect…

If you want the best UXers then provide the best CX (Customer Experience) within your hiring process, else you risk ending up with who’s leftover rather than the best person for the job. Not to mention damaging your brand presence within the market. UX as we all know, has boomed and with that boom has […]

As an ex-freelance art director, that moved into freelance (and permanent) creative recruitment, I like to think I have a good understanding of how ad agencies, design agencies and production houses recruit for creative freelance positions, but (unfortunately) I made many mistakes along the way. Based on my experience both as a freelance creative and […]

So it’s time… You’ve decided it’s your time to move on which can be both daunting and liberating, I know. This process, however subjective to your situation, if dealt with properly can make a huge impact to not only your exit but the businesses and ex-colleagues perception of you afterwards. Below I’ve put together some simple […]

An exclusive interview with Anja Maerz and Swetha Sethu-Jones, organisers of The Research Thing Meetup group…

With everything that’s going on at the moment in the world, many of you may be thinking about looking for a new role for security in these uncertain times.