As a recruiter with umbrella contractors, you may find yourself fielding questions about umbrella company pay. It’s quite simple once you understand it, but there are some common misconceptions, so in this article we’ll look at what recruiters need to know.
If the umbrella company follow best practice, they will provide your contractors with a pay illustration before they sign up. This will be an estimate of their pay, and it should include a calculation of gross pay from the contract rate, and net pay from the gross pay.
It’s important to remember that this illustration is an estimate based on the information supplied, not a promise to pay a certain amount, but it will give the contractor a good idea of what they can expect to be paid.
Calculating gross pay
You will pay the umbrella company at the agreed contract rate for the work your contractor has completed as their employee. This is the umbrella company’s income from charging their employee out to their customer (you as the recruiter). The contract rate includes the contractor’s gross pay and the umbrella company’s margin and costs – it’s important that this is clearly explained to the contractor right from the start.
The umbrella will deduct their margin and costs from the amount you pay them.
•The umbrella margin
This is the umbrella’s profit from charging out their employee.
• Employment costs
These are costs that the umbrella company has to pay as the employer. They include Employer’s National Insurance, employer pension contributions, apprenticeship levy, holiday pay and employer pension contributions.
After the umbrella margin and employment costs have been deducted, the remaining amount is the contractor’s gross pay.
Calculating net pay
From this point the pay calculation will look like a standard employee payslip - because that’s what it is. As you’d expect, there will be deductions for:
• PAYE (Income tax)
• Employee national insurance
There may also be deductions for other things, for example student loan repayments, or employee pension contributions. The contractor’s net pay will be the gross pay, less any deductions.
This process is the same for all compliant umbrella companies
There may be some superficial differences, for example they might use a different name for the contract rate, their margin might differ by a few pounds, they might roll the employment costs into one number etc, but in general terms every compliant umbrella company will calculate their employees’ pay like this.
This means the contractor will take home roughly the same amount, regardless of which umbrella company they’re employed by, and that in turn means that take home pay is a bad way to compare umbrella companies.
Instead, we suggest that recruiters look at the service levels, compliance record and additional benefits offered by any prospective umbrella partners. These will give you an idea of the experience your contractors will have while employed by them.
If you have questions or if we can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.