If you are reading this article, there is a good chance you are one of the 2.2 million-strong freelance workforce in the UK. Umbrella companies are an extremely convenient way for individuals to undertake short-term contract work, often multiple contracts simultaneously or in close succession. You can visit our guides section to learn more about how umbrella companies work.
Today, we want to talk about how much tax you pay while working through an umbrella firm. There is often confusion about how different umbrella employment is in this respect from your typical permanent role.. hint: not much at all. Let’s dive in.
THE PAYE SYSTEM
A set of rules regulates every UK employer regarding deducting National Insurance and Taxes from their employees, called PAYE or the Pay as You Earn system.
These rules determine the percentage of NI you pay based on your circumstances (how much you earn). For Income Tax, HMRC sends a tax code to your employer/umbrella, who then, based on the tax code, makes the appropriate deductions before paying you.
Let’s have a look at the National Insurance rates in the 24/25 tax year:
National Insurance
The same rules determine the rates of National Insurance you pay while working through an umbrella as in any other permanent employment.
A band system sets out how much each employee needs to pay. Everyone gets a letter from A to B, C, J, H, M and Z, but most employees fall into the category “A”.
Both you and your umbrella need to contribute; one is called the employee’s, and the other is the employer’s contribution. Let’s say what you get deducted if you get paid £1,000 a week:
Employer’s National Insurance
Your umbrella company will deduct the Employer’s NI from any invoices submitted to your agency or client at a rate of 13.8% on any of your earnings above £175 per week if you fall into category “A”.
Why is the Employer’s National Insurance deducted from your pay? This is due to the nature of the contract arrangement. The umbrella company does not benefit from your work, so it cannot cover the Employer’s NI contributions. Because the end client and the recruitment agency are not employers, they can’t pay the ER’s NI either, so it is passed onto you, the contractor.
Employee’s National Insurance
Employee’s NI rates in category “A” mean that you don’t pay anything up to the first £242 per week and pay 8% on your earnings between £242.01 and £967 and 2% on anything over £967 per week.
Please visit the Government’s website for a complete National Insurance rate table by clicking here.
Income Tax
Just as with National Insurance, PAYE rules set out tax deductions, so you should be paying over the same amount as if you were in any other permanent employment in the UK.
Tax rules dictate that everyone should pay income tax on any amount earned above the personal allowance threshold (£12,570 for 24/25). That means you don’t pay any income tax if you earn below this amount in a year.
After the next £37,700 in the year (up to a total of £50,270), you’ll pay 20% tax.
Amounts over £50,271 and up to £125,140 are taxed at 40%.
For anything beyond £125,141, 45% income tax applies.
OTHER DEDUCTIONS
Pension
Like any other employer, Umbrella companies must ask you to join their workplace pension. This is a mandatory requirement introduced by the Government to help people save for retirement. Although we must opt you in automatically, you can opt out if you wish to.
We have a handy guide on auto-enrollment pension at this link.
Umbrella Margin
Umbrella fees are called “margin”; most of the time, these are a fixed amount per week or month. You may see companies quoting percentage margins on your invoices, which may look attractive if you have less work, but once things pick up, you may find yourself handing over more of your earnings.
Ideally, the margin should be the only factor differentiating one umbrella quote from another; every other deduction (NI and tax) is a standard rate dictated by HMRC rules. We’ve discussed umbrella cost in an earlier article which you can read here.
Holiday Accrual
Some umbrella workers may see a “Holiday Accrual” deduction on their payslips, and they might rightfully ask why I get my holiday pay deducted.
When it comes to umbrella contracts, holiday pay is part of the agreed assignment rate, which leaves umbrella workers with two choices for receiving their holiday pay.
They can either accrue their holiday pay, which gets deducted from their pay each week or month and then later get presented with a “pot” of money, an excellent way of saving for that dream holiday you’ve been planning.
Alternatively, they may opt for “Advanced” holiday pay to get paid the appropriate proportion of their holiday each pay period. The advantage here is that there is never any holiday pay owed at the end of their employment period.
COMPLIANCE
We understand that taxes are no fun subject, so we won’t blame you if you feel this is too much. If that’s the case, we recommend doing one thing that will ensure that you will always pay the correct amount of tax: finding a compliant umbrella provider.
How do you do that? Look for the industry-standard FCSA (Freelancer & Contractor Services Association) accreditation next to their name, Or search for them on the accredited providers’ list here. No surprise, you’ll find us on the list, so feel free to contact us if you are after an umbrella company; our business managers will be happy to answer any questions you may have.
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