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Understanding umbrella take home pay

Updated: Aug 2, 2023

Many contractors opt to use the services of an umbrella company. After all, setting up your own limited company is a significant responsibility, so thousands choose to work through an umbrella company which makes contracting easy.

However, if you're considering this as an option you may have a few questions, and one of the main considerations will be how you will get paid.

At Umbrella Search we understand this is important to contractors who work hard for their money, and we want to ensure every contractor understands umbrella take home pay before they decide.

In this guide, we explain everything you need to know about getting paid through an umbrella company to help make that decision a little easier.

What is an umbrella company and why use one?

Before we take a look at take-home pay under an umbrella company, let's start by outlining what an umbrella company is and why you would use one.

As we've already mentioned, one of the great benefits of working through an umbrella company is that contractors don't need to set up their own limited company.

Instead, the umbrella company takes care of the business, admin and finance side of contracting for you.

The umbrella company will employ the contractor and therefore take on a range of responsibilities, including communicating directly with the client, organising invoicing, paying the contractor and deducting tax and National Insurance.

The umbrella company will also make sure that the contractor has the correct levels of insurance, including mandatory cover and any other policy they may need for their current contract. Many will also provide the option for additional cover, such as medical and accident insurance.

As the contractor is employed by the company, they also benefit from paid holiday leave, sick pay and maternity/paternity leave.

More generally, the umbrella company is always on hand to help the contractor and offer advice where necessary, whether that be on matters such as your pension pot or tax.

What is an umbrella company?

Understanding how contractors get paid through an umbrella company

As we have mentioned, when a contractor signs up to an umbrella company they become an employee of the provider.

This means that the umbrella company places the contractor on their company payroll.

The contractor will inform the umbrella company how many hours they have worked on the contract as well as any expenses they have incurred, and the umbrella company will subsequently invoice the client on the contractor's behalf. To find out more about umbrella company expenses, check out our handy guide.

Rather than getting paid directly by the client, the contractor then gets paid by the umbrella company.

The umbrella company will process the salary through their payroll using the PAYE system, which calculates and deducts the correct amounts of tax and National Insurance from the contractors' pay. The contractor will receive a payslip with a breakdown of pay and tax and pension deductions.

How does this differ from limited company contracting?

With an umbrella company, salary and tax are all sorted out for the contractor. They merely inform the company of hours worked and can leave the hard work up to them.

This is widely recognised as a significant benefit to working through an umbrella company as taxes can be tricky.

For contractors that work through a limited company, things aren't as easy.

On top of having to run their own company, a limited company contractor must deal with all aspects of pay and tax.

Rather than paying tax as they earn, like umbrella contractors, these contractors work off-payroll and instead file a yearly tax return and pay tax owed in one or two lump sums each year.

Dealing with their finances can be hard work, and they must make sure they save and set aside enough money to cover the tax bill at the end of the year.

For this reason, many limited company contractors opt to use the services of accountants. Although this makes life easier, it is an additional cost which usually comes in at around £100 or more per month.

What's more, limited company contractors may face cashflow issues when late payments are made by the client, which can cause problems for the contractor. On the contrary, an umbrella company contractor is paid on the same day or date each month by the umbrella company, despite when the company is paid by the client, meaning umbrella companies can rest assured that will have a guaranteed income each month.

Daily rate vs hourly rate

The final consideration when it comes to umbrella take home pay is whether the contractor charges by the hour or by the day, as this will impact how much you take home at the end of each month.

Although there’s lots to consider with benefits and drawbacks to each option, generally speaking a daily rate is best for more experienced contractors who are qualified to charge higher fees of approximately £400 per day upwards, whereas an hourly rate is better for contractors who will charges around £40 or less per hour.

Ready to find the perfect umbrella company? Take the next steps with Umbrella Search

Now you understand how umbrella company take-home pay works and how this differs for contractors working under a limited company, you may be wondering how you can find the best umbrella company for you. Thankfully, Umbrella Search is here to help.

Our friendly team of professionals are on hand to get to know your contractor needs in order to find a company that’s perfectly suited to you. To kick start the process and take the first step to put a boost in your contracting career simply get in touch today.

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