Umbrella payslip: how should contractors check it is correct?

The off-payroll rules have seen an increasing number of contractors now working through – and paid via -- umbrella companies. 

Here, exclusively for ContractorUK, Crawford Temple, CEO and founder of the UK’s largest independent assessor of payment intermediary compliance Professional Passport, outlines what umbrella payslips are, and recommends how contractors should check their umbrella payslip is correct.

Umbrella payslips: overview

An umbrella company payslip tends to have two parts:

• one part defines a worker’s pay -- the payslip
• the other part itemises the income received by the umbrella company, outlining the deductions that have been applied -- the pay report.

What is the Pay Report?

A pay report will show contractors the income received by the umbrella from an agency, and  it is important to check this in line with your expectations. 

The off-payroll legislation in the public sector (April 6th 2017) and the private sector (April 6th 2021) has prompted a proliferation of disguised remuneration schemes appearing on the market, masquerading as umbrella companies. So it is important that workers can understand their payslips and spot a deduction that is out of place and random, or just represents an unexpected addition.

How to check the pay report on the umbrella payslip is correct?

Many disguised remuneration schemes will reduce a worker’s income and pay the difference as a separate payment without tax being applied. It would be unusual for these amounts to be highlighted on the pay report, although a good indication would be where the amount shown as received is below what would have been expected.

We also have seen situations where the hours worked by the contractor are reported correctly, but the rate is incorrect -- resulting in a reduced receipt, once again not reflecting the reality.  A pay report should always show the total that a worker receives for a given period worked. If it doesn’t, question it.

What is skimming?

The pay report will also list the umbrella margin deduction and further deductions for employment costs. In some cases, umbrella companies often summarise the employment costs in a single line, but we recommend workers ask for a line-by-line breakdown of those deductions.

That breakdown should itemise the deduction type and the value and, where it shows both, the values must be reported correctly – or if not, you should challenge the umbrella about its practice. Commonly such practice has become known as ‘skimming’ -- an area of employment costs that contain hidden charges.

What deductions on an umbrella payslip are correct?

If an umbrella resists your request as one of its contractors to provide a breakdown of costs, this should raise alarm bells.

A breakdown of costs should list Employer National Insurance, Apprenticeship Levy (where the umbrella has met the thresholds for the levy to apply); Employer Pension Contribution (where you have enrolled in the workplace pension scheme), and the amount of holiday accrued in the period. Any other items you are unsure about must be questioned.

Under the pay report, you will see ‘gross pay’ listed, after the deductions. If you are taking advanced holiday pay (known as ‘rolled-up’ holiday pay), this will be added back in showing the total available for gross pay. This number should be the same as the gross pay shown on your payslip.

When is a contractor payslip correct?

Generally speaking, if your pay report is correct, then the amounts transferred over to the payslip as gross pay should also be correct. 

Here, you will see the Employee National Insurance and PAYE being deducted, leaving your ‘net pay.’ This should match up with the amount you then receive in your bank account as a single payment.

Gross pay is often broken down into a salary for the hours worked at National Minimum Wage with a bonus for the balance. The hours worked should be reported correctly on the payslip, and any discrepancy you discover should be brought to the attention of the umbrella company immediately.

The bonus element of pay should always be taxable but we are seeing some schemes where they claim that this bonus is tax-free.  If the bonus is untaxed, this should raise a red flag.

Holiday pay

On your payslip you may also see a line for ‘holiday pay.’ If you have requested payment of holiday pay in a given period this will be highlighted as a separate line on the payslip and the amount will be added to your gross taxable pay.

Many workers request advanced holiday pay, where any holiday pay entitlement is paid out with each week’s wages as an advance. If you too have requested to have rolled-up holiday pay , it will be shown as holiday pay advanced on your payslip. It should be added to the other elements of pay to make your gross taxable pay.

Workplace pension

If you have enrolled into the workplace pension, you will also see your pension contributions listed as a deduction.

Lastly, be alert and act if necessary

If you receive any different amount in your bank account or the amount received is made up of more than one payment, then something is wrong and alarm bells should ring loudly. That would indicate your umbrella payslip is more than merely incorrect.

Be aware, umbrella companies’ pay slips and pay reports do vary between companies depending on the payroll software they use. But they should all generally follow the above approach -- and there should be only a slight variation.

So, our message to you is hopefully clear. If you suspect something is not right when it comes to your umbrella payslips, challenge it. If you do not like what you hear in response, report it and switch to another umbrella company.