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How Umbrella Companies Work

We receive a lot of queries about umbrella company pay, and most of them come down to misunderstandings about how the umbrella companies work, so in this article we explain what umbrella company employees need to know.

Before we start:

Before we get into the technical detail of how umbrella companies work, there are some important things to remember:

  • You are employed by the umbrella company. You have a contract of employment with them, and they are responsible for paying you.

  • The umbrella will be paid an assignment rate for the work you complete as their employee. The amount they pay you will depend on the amount they receive - but the two things are different and separate.

  • Before your employment begins, the umbrella should provide you with a detailed illustration showing what you can expect to be paid. It's very important that you understand and are happy with this before you proceed.

Umbrella company supply chains

While you're working as an umbrella company employee, you are part of a supply chain that contains at least two, and most often three, other parties.

1. You are employed by the umbrella company, who supplies your services to their customer. This could be the end client, who you actually complete the work for, or it could be a recruitment agency.

2. If there is a recruitment agency involved, the umbrella supplies your services to them, and they in turn supply their customer - the end client.

3. You complete work for the end client, who pay either the recruitment agency, or the umbrella company for your services.

How do umbrella companies make money?

Umbrella companies make their money by charging out their employees at a profit. In other words, they charge their customer more for your work than they pay you as their employee.

By doing this, they allow the agency/client to outsource the cost, risk and work of employment, and they allow you to benefit from all the rights, protections and benefits of being employed, while still enjoying the freedom and flexibility of contracting.

It’s important to remember:

Your umbrella company does not charge you a fee to process your pay. This misunderstanding is surprisingly pervasive, and it’s responsible for the majority of incorrect information you’ll see about umbrella companies. Your umbrella company makes a living by charging you out to their customer, not by charging you for a service.

How do umbrella company employees get paid?

The short answer to this question is that you're employed by the umbrella company, and it's the umbrella who is responsible for paying you, and on one level it really is that simple. You have no contractual relationship with the end client or the recruitment agency, and neither one pays anything to you; you're employed by the umbrella, and that's all.

However, the amount you get paid depends on how much money you make for the umbrella company. Most umbrella pay will be made up of two elements:

  • Your basic pay rate - this is the amount the umbrella company pays you for the hours you worked according to your contract of employment. This will be set at the applicable National Minimum/Living Wage (NMW).

  • Profit share or commission - this is the profit left over from the amount the umbrella was paid for your work, after they've covered their costs and made a profit themselves.

These two elements will be added together to make up your gross pay (the amount you get paid before tax etc.)

How profit share/commission is calculated

As you might expect, the exact method of calculating the commission/profit share part of your pay can vary from one umbrella company to another, but the amount you actually get paid will be roughly the same, because compliant umbrella companies work under the same rules and have the same costs to cover.

When calculating the amount they can pay you as profit share/commission, the umbrella will make three types of deduction from the amount their customer paid them for your work:

1. Your basic pay (NMW for the hours you worked)

2. The costs of employing you - these will include employer's NI, apprenticeship levy, employer pension contributions, holiday pay and any other costs they incur as your employer. These costs will usually be itemised on your pay documents (see below).

3. The umbrella company profit margin - a small amount that the umbrella takes as their profit.

Understanding your pay documents

When your umbrella company pays you, you will typically receive two documents - though in practice they may appear as separate sections of the same physical document.

One will be a "reconciliation" or "statement", showing how your gross pay was calculated from the amount the umbrella company was paid. It's important to understand that deductions shown on this document are not coming out of your pay - this is how the umbrella calculates your pay from the amount they charged their customer for your work.

The other document will be a standard employee pay-slip, starting from your gross pay, showing PAYE tax Employee National Insurance and any other statutory deductions, and ending with the net pay amount that you will receive.

If you have questions about umbrella company pay, or if we can help in any way, please call our expert team on 01296 468483 or email

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