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The IR35 off-payroll working rules, which came into effect on the 6th April 2021, saw many Personal Service Companies (PSCs) engage the services of umbrella companies to help navigate the changes.
This increased use of umbrella companies has led HMRC to produce additional guidance on how contractors are paid through this service in a move to reassure contractors, agencies and end hirers.
As an FCSA accredited umbrella company, NWM welcomes the new guidance as an acknowledgement that compliant umbrellas are an essential part of the supply chain and crucial to the success of the IR35 legislation. It also signals that much-needed regulation for the industry could be on the horizon to help weed out bogus entities.
While the main priority for contractors is to be paid as quickly and efficiently as possible, there is now a greater need to understand precisely how an umbrella works, how they are paid, and the measures in place that ensure complete compliance.
How an umbrella works
You, the contractor, will become an employee of the umbrella company, meaning the umbrella company will:
Pay you for the work you do for the employment agency’s clients
Deduct any Income Tax and employee National Insurance contribution due under PAYE (Pay As You Earn) from your pay.
You will also receive employee benefits, including paid holiday. With NWM, you’re also covered by comprehensive insurance policies, ensuring you always have the right level of protection while working with us.
Breaking down how it works
It’s important that contractors understand the process. Here’s the breakdown:
1. The end client that you work for pays the agency for your services.
2. The agency deducts a fee for placing you with the client and pays the rest of the money to the umbrella company. That money is sometimes referred to as the ‘assignment rate’ or the ‘limited company rate’.
3. This rate is different to the rate you get paid from the umbrella company because of the additional costs for the umbrella company, which include:
Administration costs (sometimes charged separately to you by the umbrella company)
Employer National Insurance contributions
Employer workplace pension contributions
Other amounts that cover other specific costs, such as Apprenticeship Levy.
The rate paid to the umbrella company by the agency will need to cover the costs of the employer National Insurance contributions. The umbrella company will use this money to pay employer contributions and not deduct the contributions from your gross pay.
When it comes to holidays, you are entitled to paid statutory annual leave based on the hours that you work. Like any employer, if you leave the umbrella company with annual leave owed to you, they must pay you for it.
Helping you understand
Before you start work with an umbrella company, you will be given a key information document by the employment agency, which will include all the details about what you will be paid. Umbrella companies will usually provide you with a listed reconciliation statement and a payslip.
At NWM, we aim to provide complete clarity and will send you regular text and email notifications to ensure you are always kept up-to-date. Plus, you have 24/7 access to your online account, which provides information on all of your payments and tax contributions whenever you need it.
Find out more
Head to the Gov website to read through the latest guidance on working with umbrella companies. Additionally, the NWM team is on-hand for a no-obligation chat or to answer any questions you have about working with an umbrella. Call us on 0330 333 4240 or email firstname.lastname@example.org.