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How Umbrella Companies Work

| July 12, 2013 | 6 Comments

teacher-chalkboardAt the RMTA blog, we have covered payroll topics in our posts “What is an Umbrella Company” and “How to Claim Expenses as a Supply Teacher“. To complement these earlier articles, below is a guest post by Adam Barton, founder of umbrella company Generate FS. Here we learn a little bit more about how umbrella companies work and how, as teachers, you can increase earnings by offsetting work-related expenses.

What are umbrella companies?
Umbrella companies are limited companies that employ contract workers. They provide a simple cost effective operating structure where you use your expenses to increase your earnings. There are no costs to join or to leave and umbrella companies only make their margin when you are working. The contractor is employed on a contract of employment and is covered by the companies insurances.

How do your expenses increase your earnings?
When working through an umbrella company solution you may hear the words “offsetting expenses”. What this means is that all your expenses reduce the amount you are taxed against your earnings. For example:
A contractor earns £600 in a week. This contractor has £100 of eligible expenses. When the umbrella company calculates the tax, they firstly deduct the £100 for the contractors pay and then apply PAYE and NI taxes on the £500. As you can see, the more expenses you have, the less tax you pay. Please note: all contractors have to pay tax on their national minimum pay so at no point can you get away from not paying any tax at all.

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What is an Umbrella Secondment?
An umbrella Secondment is only offered to international contractors who are moving to the UK for contract work. If the contractor has registered with an umbrella company (Only some umbrella companies offer the secondment package) before they leave their home country they can “offset” flights costs, rent, food as well as the usual expenses which can be claimed for non-secondment contractors.

Working out your payslip
When working through an umbrella company, payslips can be confusing so you want to make sure you are receiving the right amount of money. An umbrella contractor’s pay is broken down as follows:
• Basic pay x amount of hours worked. (basic pay is national minimum wage)
• Bonus/ commission (this is the amount of money you have earned above the national minimum wage)
• Expenses (how many expenses the contractor has to offset)
• Re-payable expenses – expenses which you have agreed to be paid back by your employer.
• Deductions are then made for the following:
• PAYE
• National Insurance
• Employers National Insurance
Warning. If your payslip doesn’t show these deductions you could be being paid illegally. Ask your umbrella company provider to explain or contact Generate FS for support.

An introduction to UK legislation
Agency Workers Regulations – This is where contractors receive the same environmental benefits as a permanent employee from their first day. For example, free parking, discount on food in the canteen, locker space etc. If you stay at the same place of work for 12 weeks you are then entitled to all the same benefits such as holiday, sick, pay etc.
IR35 – This law is in place to govern how a contractor can be paid in relation to working through a 1 person Limited company. Please note: teachers aren’t able to work this way.

If you would like more information on how umbrella companies work, we recommend talking to your agency or contacting an umbrella companies directly.

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Please note: This is a paid advertorial. The views within this blog post are for information only and are not to be considered those of RMTA.

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Comments (6)

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  1. Brad says:

    I would advise everyone to avoid Umbrella companies at all costs and insist on being paid through PAYE by your agency, especially now as the laws have been changed and hardly anything can be claimed.

    Coming from Australia I fail to see the purpose of Umbrella companies for workers. When you sign up for an agency you will be pressured to join one, fed a bunch of bullshit about how it benefits you, but really the only people who benefit are the agency, because they want to make as much money as they can off of you.

    I was with ISS and couldn’t believe how much pay I got. For some reason they took fees from every separate supply day I worked, instead of in one large block, so my gross pay for the day was 135 Pounds and after ISS took all of their bullshit fees my pay was a ridiculous 75 Pounds a day. An absolute disgrace!.

    Thankfully now I am back working in Australia where I am paid a decent wage by the government and don’t have put up with the disgraceful teaching agency system staffed by money grubbing charlatans in the UK.

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  2. Cynthia says:

    I worked for an umbrella company as a supply teacher, retired and in receipt of pensions. Over 2.5 years they consistently paid my tax incorrectly, as a person who had always paid PAYE I didn’t realise that this was happening. At the end of the first tax year I was very nice, accepted some liability and assumed the problem solved. As there has been a further problem this year I have severed links with them, complained bitterly and am still awaiting a letter of apology. Check your payslips carefully

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  3. Dylan says:

    Hi,
    I’m a relatively new worker here in the UK. I am a teacher and have been working through an agency since I moved from Canada. I live in London and my daily rate is supposed to be £120/day. This would equate to £600 a week before deductions. I understand deductions, but does it make sense to only be getting £376 a week from that? seems a little strange that I’m losing almost half of my weekly pay (2 days of work) every week. I’m just wondering if I’ve been taken advantage of.
    Any help would be appreciated!

    Dylan

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  4. Chris Hunt says:

    I am with Career Teachers as my agency and Generate FS as my Umbrella Company.
    It works really well. Careert Teachers have kept me in full employment for 3 years now and Generate ahndle all my pay, expenses etc. The process is seamless; the tax position is all worked out and correct and my expenses are fully covered. I have always been paid fully and on time. If you are unhappy just get with the right people!
    Chris

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  5. Mrs Rennison says:

    I recently returned to an agency I had not worked for a short time. I received a telephone call from an umbrella company claiming that they were doing the wages for them. I agreed to sign up. When I visited the site I had to agree to terms before allowed access to my wage slips. They already had been given my details/e-mail etc. Not only did I pay from my wages the employers contributions and my own, also an employer’s margin, when I asked about this they said from the money paid to them, that they could then on behalf of the agency pay from my earning their margins and employers contributions. They took tax, even thought my tax code is 1000L W1 which is an allowance of £10,000. It took some argument and even a threat of a reduced daily rate to get out of it. However I am still unhappy about what happened and feel totally ripped off. It took a week or more to sign out and they still have some wage slips, because as soon as I was out, so my access to my account. How can I take this matter further?

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  6. Mrs J O'Brien says:

    Re: Umbrella companies. The UC used by my supply agency are terrible. They won’t set up an online account for me so I can’t claim expenses and view pay rate and deductions etc., They won’t send paper payslips on a regular basis. I have complained via telephone and in writing. How can I take this matter further (legal action if necessary)? Thanks for any advice.

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