Umbrella companies pay employees using the standard PAYE system, calculated the same way for all employees in the UK. This is applied to your salary after their margin and employer costs have been retained from your gross contract rate.
When working out how much take home pay you will get under an umbrella company, it’s important to understand the difference between your contract rate and your taxable salary.
Your contract rate is usually the figure that you have been provided by the agency or end hirer. This is the amount invoiced and paid to your umbrella company. The umbrella company then removes certain amounts from the gross figure:
o Employer costs (Employers NI and apprenticeship Levy)
o Umbrella company margin
This gives you your salary. Just as with standard employment this is then subject to PAYE tax, so the umbrella company will retain:
o Income tax – calculated at the rate for your earnings bracket
o Employees National Insurance
Whatever is left is your take home pay – the amount transferred into your bank account. When negotiating your contract rate, you must take these deductions into account before agreeing on a figure, so you know exactly how much you will earn.