umbrella assignment rate meaning

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Official government guidance: Working through an umbrella company

The government has released some guidance online designed to help contractors, freelancers and agency workers who may require the services of an umbrella company. ‘Working through an umbrella company’ is a short piece of text (estimate 5-minute read) that will help cover the basics of umbrella payroll and provides you with information to ensure you choose a compliant provider. Keep reading, and we’ll summarise the guidance for you, but we recommend you read the official version too (linked below).

Read the official government guidance

The official government guidance called ‘Working through an umbrella company’ is available here .

Getting paid

When you join an umbrella company, you become an employee of theirs, and the umbrella is your employer. The umbrella company will process your payroll, but you conduct work for your employment agency’s client (or direct with a client if there is no agency within the supply chain). Umbrella companies operate PAYE – Pay As You Earn .

How an umbrella company pays you

Your end client will pay your agency, and the agency will then pass this on to the umbrella company. Agencies will deduct a fee for placing you at the client, and the rest is transferred. This is often referred to as the “assignment rate”. The government acknowledge that:

“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.”

The deductions that an umbrella will make will include PAYE (income tax and Employee National Insurance Contributions) and the employment costs (Employer’s National Insurance Contributions and the Apprenticeship Levy). Temporary workers should receive an uplift in their rate to cover these deductions.

What you will be paid by an umbrella company

Usually, when an umbrella pays you, this amount is referred to as the “contract rate”. It consists of an hourly rate at the National Minimum Wage (NMW), and the rest as a taxable “bonus” or “additional pay”. This is considered your gross pay before any deductions have been made. Be warned – if you come across any payment that the umbrella company describes as “non-taxable”, they may be a tax avoidance scheme.

Your gross pay will be subjected to PAYE. You may also be deducted additional amounts to cover student loan repayments and pension contributions.

If you believe an umbrella is wrongly processing your payroll, the government recommend you contact the following:

• ACAS (Advisory, Conciliation and Arbitration Service)
• Citizens Advice
• Trade Union Representative

We recommend you contact the FCSA and Professional Passport too – if the umbrella in question has one of these accreditations. We’ve written a blog that may be handy: How to report a non-compliant umbrella company.

Key Information Documents

Before you start working and being paid through an umbrella company, you should have been issued with a Key Information Document (KID). This is an official document that an umbrella provides that’ll explain your pay and the deductions that will be made. Key Information Documents should give you an accurate representation of your take-home pay working through that umbrella.

Reconciliation statement

This document will give you a breakdown of how the umbrella has processed the assignment rate received and how they’ve deducted their costs (Employer’s National Insurance Contributions, for example). The government guidance state that  “these amounts should be deducted from the umbrella company’s assignment rate, not your contract rate.”

Umbrella company payslips

When you use an umbrella company for your payroll, you’ll receive a payslip – very similar to somebody in permanent employment. Umbrella payslips should show you your gross pay and highlight all the deductions that have been made to leave you with your net salary. More information is available on the government website regarding understanding your pay.

We’ve written a blog that may be helpful, entitled: What deductions appear on umbrella company payslips?

Tax avoidance

Interestingly, the guidance makes it clear that  “most umbrella companies are compliant with the tax rules”.  However, it mentions that some are tax avoidance schemes.

Tax avoidance schemes are designed to help workers pay below the expected amount of tax and National Insurance Contributions by taking advantage of loopholes in UK tax law. While tax avoidance may technically be legal at the time, HMRC is retrospectively punishing those who engage with such schemes. The penalties can be severe.

If you believe you’ve engaged with a tax avoidance scheme, HMRC urges you to get in contact with them to settle your tax affairs.

Reporting non-compliant umbrella companies

You can report non-compliant umbrella companies to HMRC. More information is available here .

Top 10 umbrella companies

If you’re looking for an umbrella company, we’ve put together a list of top 10 umbrella companies that we recommend. They’re all accredited by either the FCSA or Professional Passport . Plus, some of them have amazing offers at the moment.

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What is an Assignment Rate? Plus other umbrella pay questions

The difference between an assignment rate and worker’s gross pay is one of the most common causes of confusion amongst workers who are new to umbrella employment.

When you contract via a PAYE umbrella company, you are an employee of the umbrella company, and the umbrella company is your employer. All employers must pay employer’s National Insurance Contributions (NICs) on payments made to their employees. This cannot be deducted from worker’s pay and it is therefore built into the assignment rate.

The assignment rate includes employment costs such as employer’s National Insurance, holiday pay, apprenticeship levy, and pensions contributions. Such costs should always be factored into the assignment rate quoted by the agency because, as employers, umbrellas are legally obliged to pay them.

Why is there a difference between a worker’s assignment rate and gross pay?

As with employer’s NICs, the money to cover any employment costs, including wages, all comes from the rate charged by the umbrella company to the agency or end client.

Umbrella companies must also allow for:

• 12.07% Holiday Pay (this can be advanced to you each week, or accrued)
• 0.5% Apprenticeship Levy (when umbrella’s total payroll reaches a certain level)
• 3.0% Employer Pension contribution (this is paid into the workers workplace pension)

This is why an assignment rate is usually much higher when a worker contracts through an umbrella company, as it needs to cover all of these costs.

If a worker was to be employed directly by the agency or end client, his or her PAYE assignment rate would just cover your wages, and the agency or end hirer would pay the other employment costs.

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What is the difference between your assignment rate and gross rate of pay?

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The difference between a contractor’s assignment rate and gross rate of pay is an area that often causes a lot of confusion – especially if you are new to contracting. Continue reading to discover the difference and why the two pay rates are displayed on your payslip.

What is the assignment rate?

The assignment rate is made up of the actual wages payable to you (your gross pay), the recruitment agency’s and the umbrella company’s fees (or margin), and the employment costs. As employers, umbrella companies are legally required to pay employment taxes on any income paid to their employees. However, as umbrella companies only charge a small margin (typically between £15-30 per week) and have no financial gain from your work, they would be operating at a loss if they paid it themselves. Therefore, the assignment rate paid to the umbrella company by the recruitment agency or end client is different from the rate you are due to be paid, as it includes additional employment costs for the umbrella company. The employment costs include:

• Employer National Insurance Contributions
• Employer Workplace Pension Contributions
• Holiday Pay
• Administration costs (e.g. the margin, which are sometimes charged separately to you by the umbrella company)

Please visit the government’s website for more information about how you will be paid when working via an umbrella company.

What is the gross rate of pay?

The gross rate of pay (also sometimes referred to as the contract rate) is the actual wages payable to you (before tax deductions) by the umbrella company for the work you have completed. The umbrella company will deduct Income Tax and Employee National Insurance Contributions through their PAYE system and pay these to HMRC. Other deductions, such as workplace pension contributions and student loan repayments (if applicable), will also be taken. The remaining amount is your net pay, and this is the amount that will be paid to you.

How to understand deductions to your pay

It is possible to see a breakdown of the deductions that will be made to your pay before you register with an umbrella company. You will also receive a payslip for each payment made to you by the umbrella company.

Key Information Document

A Key Information Document (KID) will be provided to you by your recruitment agency before you accept an assignment. The KID is intended to improve the transparency of the information supplied to temporary workers, particularly regarding pay and the deductions that will be made. The KID provides an overview of the fees and deductions concerning the assignment rate and contract rate (gross rate of pay) and how this affects your net pay. The KID will outline what the recruitment agency will pay your umbrella company and what your umbrella company will pay you.

When the umbrella company pays you, you will receive a payslip with each payment listing the deductions that have been made to your gross pay. It is a legal requirement for your payslip to show the following:

• Your gross rate of pay before and after deductions
• The amount deducted for each tax deduction – for example, the amount of Employee National Insurance Contributions and Income Tax , which will change depending on the hours you work each week/month
• The number of hours/days you have worked

The assignment rate paid to the umbrella company and the deductions for the employment costs will also be listed in a separate section to show the umbrella company is making the correct employer tax deductions.

Contact us today for a free and impartial take home pay illustration

If you have any questions regarding the tax deductions made to your pay. In that case , our expert Sales Consultants can explain everything you need to know to ensure you understand how you get paid when working via an umbrella company. Please call us on 01707 871622 or request a callback for a time that suits you. We look forward to speaking with you!

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Founded by an IT Contractor in 1998, Churchill Knight has become one of the most respected contractor accountants in the UK. We’ve helped over 20,000 contractors with their accountancy requirements. As well as our accountancy services, we also have an industry-leading PAYE umbrella company and dedicated in-house personal tax department . Whichever service you choose, you can move forward with complete peace of mind. We are proud of the reputation we’ve built over the years, and our FCSA accreditation proves how committed we are to compliance within our sector. Keep reading…

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Responsibilities for employment businesses working with umbrella companies

How to protect your employment business, and the workers you supply, from non-compliant businesses in your supply chain.

As an employment businesses (sometimes called a recruitment agency) you find workers for other businesses (sometimes called end clients).

You may use umbrella companies to employ those workers. The umbrella company will usually be the worker’s employer and is responsible for:

• paying the worker’s wages
• operating PAYE as part of their payroll

While many umbrella companies operate legally and compliantly, some do not. They may not pay all the money owed to the worker or to HMRC.

Working within the law

As an employment business, you must comply with employment and tax law when working with umbrella companies, including requirements for:

operating in the recruitment sector in the Employment Agencies Act 1973 and the Conduct Regulations 2003

ensuring agency workers are treated no less favourably than comparable permanent staff in the Agency Workers Regulations 2010

submit the quarterly employment intermediaries return for workers you place with end clients where you do not operate PAYE including umbrella company employees

operate PAYE where the workers you supply to a UK end client are employed by an overseas employer such as an umbrella company with no UK presence, under the rules for offshore intermediaries unless someone else operates PAYE on your behalf

follow the VAT requirements for operating self-billing with an umbrella company

pay tax and any National Insurance contributions on any cash incentives or rewards your employees receive directly from an umbrella company

include incentives or rewards your business might receive from an umbrella company, like payment for inclusion on a preferred supplier list, as part of taxable income or profits under the rules for income tax and rules for Corporation Tax

prevent illegal working, including checking that umbrella companies are carrying out and recording right to work checks on temporary workers, as set out in the Immigration, Asylum and Nationality Act 2006

not agree to or accept gifts including money which encourage any part of the supply chain to perform their functions or activities improperly or rewards them for having already done so, as set out in the Bribery Act 2010

Supporting workers

Workers can find being employed by an umbrella company confusing and working for a non-compliant umbrella company can cause them problems. Supporting workers can mean you’ll receive fewer queries, improve compliance in your supply chain and help protect your business’s reputation.

Explain how the worker will be employed

Explain how the umbrella company employment arrangement will work to the worker, as well as any other options for arranging employment that might be available to them, so that they can decide if it’s right for them.

You should share information on working through an umbrella company with workers. This will help workers understand employment rights and tax responsibilities.

Be clear about pay rates

Be clear about pay rates when you advertise a job and when you discuss roles with prospective workers.

You should be clear that:

• the assignment rate (sometimes known as the contract or uplifted rate) is the rate that you will pay the umbrella company not the worker
• the worker’s gross pay will be less than the assignment rate

Issue Key information documents ( KIDs )

You must provide workers with a Key information document ( KID ) under the Conduct Regulations 2003 .

KIDs need to to be issued when workers first register with you, before you provide any work-finding services. They must be updated and reissued when there are significant changes.

Some umbrella companies will have created KIDs for employment businesses to use. However, it is always your responsibility to issue KIDs and this cannot be deferred to a third party like an umbrella company.

Before a Key information document is issued make sure:

• it contains the name of the umbrella company
• it is clear, accurate and covers only the required information
• any information you need to complete the KID has been obtained from the umbrella company in writing
• that you have a process for getting updated information from the umbrella company when things change

For support completing a KID contact the Employment Agency Standards Inspectorate ( EAS ) .

What happens if you work with umbrella companies that do not follow employment and tax law

There can be serious consequences for your business if you are involved in non-compliant supply chains and do not take reasonable measures to avoid this. A non-compliant supply chain might include umbrella companies who do not follow employment and tax law.

In most circumstances, claiming that you were not aware of non-compliance is not a defence. 

If HMRC investigates and finds you are involved in non-compliant supply chains, we may take action. This includes but is not limited to:

prosecuting you for failure to prevent facilitation of tax evasion in the supply chain

denying your right to recover VAT input tax and issuing penalties if you knew or should have known you were connected to VAT fraud

issuing an enablers penalty if you use an umbrella company that is operating tax avoidance or if you have been involved in designing, marketing or facilitating another person to avoid tax

publishing details of those involved in tax avoidance schemes including promoters, enablers and suppliers and details of deliberate tax defaulters

The Employment Agency Standards Inspectorate can: 

close businesses and ban directors and others from running an employment business and publish their details where they breach the Employment Agencies Act 1973  or other relevant legislation such as the   Conduct Regulations 2003 , due to misconduct or unsuitability

publish the names of individuals who have been banned from running an employment agency or business

The Gangmasters and Labour Abuse Authority ( GLAA ) issues penalties for criminal offences under the Gangmasters (Licensing) Act 2004, including those who use unlicensed umbrella companies in the sectors covered by the GLAA .

If HMRC, the EAS or GLAA take action against your business, it can damage your business’ reputation and ability to secure and maintain contracts and business relationships with end clients and workers.

Protecting your business

To protect your business you should understand your supply chains and take action if you spot non-compliance.

It is your decision whether to work with an umbrella company and you should not do so if you suspect they are not compliant, even if a worker requests it.  

Due diligence

Only use umbrella companies that you have carried out due diligence on.

You should:

• identify the entities in your labour supply chain
• understand how workers are being engaged and paid
• assess and reduce any risks of non-compliance

The checks you undertake should be regular, reasonable and proportionate for your business.

You should keep a record of the due diligence checks that you have undertaken on an umbrella company.

make sure that if workers ask to work through a particular umbrella company, this is not because increased take home pay or additional untaxed payments they have been promised by the umbrella company, which can be signs of tax avoidance

find out if the umbrella company is outsourcing its employer responsibilities to a third party, and do due diligence on that third party

check the umbrella company is VAT-registered , charging VAT, and the details provided by the umbrella company match

check the umbrella company details you have match those registered with Companies House

get reconciliation statements directly from the worker (where they have them) to check the assignment rate matches the money you have sent to the umbrella company

get payslips directly from the worker to check the umbrella company is acting as the employer and operating PAYE

check payslips  and reconciliation statements you have obtained from workers for unexplained deductions (sometimes called skimming), tax avoidance or underpayment of National Minimum Wage

check the name of the umbrella company corresponds with the bank details provided by the umbrella company

check the umbrella company has the required insurance including employers liability insurance

check the accreditation status any umbrella company claims to hold with the relevant body

check whether the umbrella company holds a GLAA licence on the GLAA website if it operates in a sector covered by the GLAA

Umbrella companies can be involved in many forms of tax non-compliance and there are checks you can carry out to identify them.

These checks:

• help you to apply due diligence to assure your labour supply chains
• prevent criminal facilitation of tax evasion
• reduce the risk of using an umbrella company that operates a tax avoidance scheme
• protect your supply chains from mini umbrella company fraud

Signs of mini-umbrella company fraud can include:

• regularly having to reissue KIDs to workers because the umbrella company keeps changing
• differences between the employer’s name on the latest KID and the latest payslip
• frequent changes to the PAYE reference number which may be included on payslips

Your end client may also want evidence that the umbrella company is the employer and operating PAYE to ensure compliance with off-payroll working rules . You should share this if asked.

Reduce your risk

Structure your supply chains in a way that is easy to understand. You can do this by keeping your supply chains as short as possible. This makes it easier to carry out due diligence and lowers the risk of non-compliance further down the chain, particularly by fraudulent umbrella companies. 

Give your staff training to help them identify non-compliance within your supply chains and have clear procedures on how to report it.  

If you think that an umbrella company in your supply chain is operating non-compliantly report them to their accreditation body if they belong to one.

Report concerns

You can report tax fraud and avoidance by a person or business to HMRC .

You can report concerns about pay and work rights including National Minimum Wage, employment agencies, gang masters, or working hours.

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