HM Revenue & Customs has released a new tool and guidance this month so that workers and employment businesses that use umbrella companies can work out what gross and net (take-home) pay should be for an individual role. The calculation includes what deductions are applied.

The tool was published on 3 December and has been added as a resource to relevant guidance pages that relate to working through or with umbrella companies. Its calculations will only work out pay for the current tax year.

Why is such a tool necessary?

It is well-known within the contracting market that a lack of official regulation has led to a proliferation of fraudulent schemes and activities by a minority of payroll suppliers, known as umbrella companies, including incorrect tax deductions, pay skimming, and withholding of holiday pay.

The consequences of these schemes is that they put recruitment businesses and workers at risk. For example, workers that are paid by unscrupulous umbrella companies may receive a substantial and unexpected tax bill down the line, to repay the taxes owed.

Through these activities, HMRC also loses out on significant sums of owed taxes, estimated at £500 million in 2022 to 2023, creating a substantial drain on financial resources.

Who should use this new tool?

Whilst regulation of umbrella companies is now on its way, as announced as part of the Autumn Budget, this will not be in place until April 2026. Therefore, in the meantime, workers should use this tool to make sure that the correct deductions are being made from their pay. Recruitment agencies should also use the tool in order to check how much a worker should be getting paid, to ensure that the umbrella companies they have engaged are complying with tax regulations.

What you need to get started

As outlined in HMRC's new guidance, in order to use the tool, workers or recruitment firms will need to have the assignment rate for the role (also known as the uplifted rate, umbrella rate, day rate, or hourly rate). The following documents, which can be obtained from the umbrella company, may also help when using the tool:

• A payslip
• A pay statement, also known as a reconciliation statement
• An assignment schedule

The tool is anonymous and does not collect identifying information. More information and guidance is available on the HMRC website.