If you’re using an umbrella company for your payroll or are interested in using one, you’ll be familiar with umbrella company take home pay calculations. If you’re not familiar – they’re an estimate of how much you should expect to retain each payment frequency – after deductions. In honesty, all umbrellas should be quoting you very similar pay retention because they should all process your pay identically (PAYE). However, we’ve been informed that some umbrella companies provide misleading calculations to contractors and freelancers – to trick them into believing they’ll retain more of their money than using another umbrella. Keep reading, and we’ll explain why this has rattled our cage and what you need to look out for when requesting a calculation.
We’re not in the business of naming and shaming, but we are here to raise awareness
We are not prepared to name and shame umbrella companies because we’re here to help educate rather than hand out accusations. However, when we heard that umbrella companies might be behaving unethically – we wanted to spread the word because it may help our readers.
Umbrella companies that include expenses in their calculations are almost certainly trying to trick you
So, what have we heard? It’s been brought to our attention that some umbrella companies automatically include a fixed amount of expenses in their calculations – as standard. If you’re familiar with umbrella companies, you’ll be fully aware that you’ll almost definitely be subjected to SDC when in the workplace, thus making you ineligible to claim tax relief on travel and subsistence expenses. Therefore, the only reason an umbrella would include expenses in their take-home pay calculations – as standard – is to confuse contractors and trick them into believing they’ll retain more of their money than they actually will.
What happens if you use an umbrella company that has provided you with a misleading calculation?
There are two likely outcomes if you use an umbrella that’s quoted you with an allowance for expenses. The first thing that may happen is that you’ll retain far less than what they quoted you. They might have included expenses to entice you to register with them, but they may not process them. If this happens, the umbrella will have already retained their margin (because they will have paid you), and leaving their service could be troublesome. After all, if they’ve tricked you into using them rather than other umbrella companies, is their customer service going to be up to scratch?
The second thing that may happen is that they’ll actively try and encourage you to claim expenses. If this is the case, your take-home pay may be higher compared to what other umbrellas have quoted.
But consider the following – if HMRC investigates you and concludes you’ve unlawfully claimed expenses – the penalties could be severe. Trust us – it’s not worth it.
Most compliant umbrella companies don’t allow any expenses
Since the government introduced SDC (Supervision, Direction and Control) in 2016, almost every contractor found themselves unable to claim umbrella company expenses. As a result, most umbrellas don’t allow anyone to claim expenses, whether they think they’re entitled or them or not.
Compliant umbrella company take home pay projections – in a nutshell
Compliant umbrella company take home pay calculations should be based entirely on your circumstances. This means that the following should be taken into consideration when giving you a quote:
The assignment rate (the amount you have agreed to be paid for carrying out your work – taking into account the deductions that occur when using an umbrella company for payroll purposes)
- Income tax
- Employees National Insurance Contributions (NIC)
- Employment costs (Employer’s NIC and the Apprenticeship Levy)
- How much time you’ll have out of work over the course of a year
- Tax code
- Student loan (whether or not you’re paying back a type 1 or type 2 student loan)
- Pension (whether you’ll be contributing towards a pension)
- The abatement that means you lose £1 of your personal allowance for every £2 you earn over £100,000
Should all umbrella company take home pay calculations be the same?
If every umbrella company had a £25 per week margin, they should all be quoting you a very similar take home pay retention. This is because compliant umbrella companies will process your payroll with HMRC’s tax system ‘Pay as you Earn’. The only thing that should impact your take-home pay amount between umbrellas is the margin. For example, you’ll pocket a few extra pounds every week if you choose an umbrella with a £10 per week margin compared to one with a £35 per week margin.
One thing that’s worth noting – umbrella company take home pay calculations are just an estimate, and compliant, ethical umbrella companies will do their best to give you an accurate figure. However, the amount you retain could vary slightly from the calculation you’re given due to several factors, including how far along the current tax year you are, and your tax code. Always speak with an umbrella before requesting a calculation – to ensure they’re doing their bit to provide you with realistic figures.
If you have any advice for contractors or freelancers who are considering using an umbrella company, please leave a comment below.