Compare Your Pay - Umbrella Company Glossary

Contractors in the UK who use or think about using umbrella companies encounter challenging terms and procedures difficult to comprehend. In this glossary Compare Your Pay cover terms from “assignment rate” to “statutory entitlements” which clarify umbrella employment language to help you maintain control over your income and contracting career.

We hope this guide will help newcomers to umbrella and those seeking to understand their payslip details.

Assignment Rate

The umbrella company receives payments from either the recruitment agency or the final client which constitutes their total income. The assignment rate includes your salary together with employment expenses such as employer NICs and pension contributions as well as the umbrella company’s fee.

Contractor Agency

An intermediary that connects contractors to clients. An agency handles negotiations for the assignment rate while ensuring the payment reaches the umbrella company which then disburses your earnings.

Auto-Enrolment Pension

Umbrella employees receive automatic enrollment to their workplace pension scheme once they fulfill the minimum requirements such as age and earnings threshold. Opting out is possible but contributions begin automatically after a brief waiting period.

Bribery Act 2010

UK law bans businesses and umbrella companies from participating in corrupt activities or failing to address them. Responsible umbrella providers must adhere to an additional compliance requirement.

Client (End Client)

The business or organisation where your contract services are carried out. The client receives advantages from your work even though your direct employment is with the umbrella company.

Continuous Employment

Umbrella companies that offer continuous employment contracts keep their contractors employed during periods between different work assignments. This arrangement provides support when applying for mortgages or obtaining credit lines.

Contractor

A contractor works on short-term projects for various clients through an umbrella company or their own limited company. Contractors tend to focus their work on IT, healthcare, construction, education or finance sectors.

Day Rate

The agreed daily rate for your services constitutes the basis for calculating your assignment rate. The amount isn't your net salary because it decreases due to employment expenses and taxation.

Deduction at Source

The umbrella company subtracts Income Tax, National Insurance, student loans when necessary alongside its margin from your gross pay before handing you your net pay.

Employee Benefits

When you work for a compliant umbrella company you gain official employee status. Statutory advantages including paid holiday entitlements, sick leave options, maternity/paternity remuneration and pension scheme access become available to you.

Employer’s National Insurance (NI)

The umbrella company needs to pay a contribution based on your earnings. The cost is included in the assignment rate and remains separate from your gross pay because it's subtracted before the pay calculation.

Employment Rights

Umbrella employees receive legal protections which include minimum wage rights along with entitlements to rest breaks and holidays. Ensure that your umbrella employer fully respects and implements your employment rights.

Expenses (Limited)

Umbrella employees since 2016 have limited eligibility to claim travel and subsistence expenses only when their position meets the criteria of being temporary and mobile. The majority of contractors cannot use umbrella companies to claim their expenses anymore.

Fixed-Term Contract

This contract has clearly defined start and end dates. Your umbrella company may place you on a fixed-term contract that lasts for the entire length of your assignment.

Freelance

The term freelance applies to self-employed people but frequently stands in for "contractor". Self-employed professionals work through umbrella organisations or as sole traders and may establish proprietary limited companies.

Gross Income

Your umbrella company determines your total pay after subtracting employment costs but before applying personal deductions such as tax and pension.

Holiday Accrual

Your holiday pay accrues separately with certain umbrella companies who issue it when you take time off. The holiday pay from these umbrella companies combines with weekly or monthly earnings. You need to know how your umbrella company manages this process.

HMRC Compliance

A compliant umbrella company operates according to HMRC standards regarding PAYE and RTI systems alongside employment legislation. Offshore tax model usage and tax evasion practices of non-compliant companies can expose you to risks.

Inside IR35

The classification of your contract as “inside IR35” establishes your employment status as an employee according to HMRC guidelines. The umbrella model stands out as the most straightforward and secure payroll option for such situations.

Invoice

Umbrella companies generate invoices for agencies or clients using your submitted timesheets. The payment they receive includes your salary as well as employment costs and their profit margin.

IR35 Legislation

The legislation was established to stop tax evasion by contractors who function as employees. The tax treatment for individuals who fall under IR35 rules matches the taxation system used for regular employees.

Key Facts Statement

This legally required document details your pay calculation with all deductions and costs before you accept an assignment.

Legitimate Umbrella Provider

An umbrella provider who meets all tax law requirements and respects employment rights and financial regulations. Avoid umbrella companies that make unrealistic payment promises or fail to provide pay-related paperwork.

Limited Company Contractor

An alternative to umbrella employment. As a Limited Company Contractor you operate your own business and handle your financial responsibilities. You can achieve greater tax efficiency through this path when you operate outside IR35 regulations.

Margin (Umbrella Fee)

The umbrella service charges a fee for payroll management which they apply weekly or monthly. The umbrella fee deduction happens before your gross pay amount is computed. Transparent umbrella services display their fees directly on your payslip or contract document.

Minimum Wage Protection

The National Minimum Wage (NMW) serves as the minimum payment requirement for all umbrella employees. An employer who makes deductions that put your pay below the NMW violates the law.

Net Pay

Net pay represents the sum deposited into your bank account after all taxes, National Insurance contributions and pension deductions have been subtracted.

PAYE (Pay As You Earn)

Your employer collects Income Tax and National Insurance from your wages before paying you through this system. Umbrella workers are paid through PAYE. 

Payslip Breakdown

Your payslip should show all elements of your pay: Your payslip should display your gross earnings along with employer costs deductions holiday pay and net pay. A quality umbrella simplifies the understanding process.

Preferred Supplier List (PSL)

Your agency or end client provides a list of approved umbrella companies. The system guarantees that providers who pass vetting procedures and meet compliance standards are selected. Certain agencies require that you select your umbrella company from their Preferred Supplier List (PSL).

Professional Indemnity Insurance

Umbrella firms provide their workers with several types of insurance coverage, including professional indemnity as well as public liability and employer’s liability insurance. Professional indemnity insurance offered by umbrella companies safeguards employees against any issues that arise during their work assignments.

Real Time Information (RTI)

HMRC requires umbrella companies to provide payroll data with each payment to you. RTI reporting refers to the process that ensures your tax records remain accurate and up to date.

Recruitment Agency Margin

The recruitment agency charges clients a fee to find and manage contractors. The umbrella fee does not include this expense and does not require direct payment from you; however, it impacts your final assignment rate.

Right to Work Checks

Umbrella companies need to validate your authorisation to work within the UK. Employers need to verify identification documents together with visas or settled status when hiring non-UK nationals.

Rolled-Up Holiday Pay

Your regular pay includes holiday pay which is not set aside separately for accrual and future payment. It's legal but requires representation in written form and must appear on your payslip.

Self-Assessment

Umbrella workers receive PAYE taxation but must complete a self-assessment if they earn extra income through sources like rental properties or dividend payments.

Statutory Payments

You qualify for Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), and Statutory Paternity Pay (SPP) as an employee if you meet the necessary eligibility criteria.

Take-Home Pay

Your actual earnings after all deductions. Exercise caution with umbrella companies offering unusual take-home pay rates because they might use illegal tax structures or be non-compliant.

Timesheet

The timesheet serves as documentation of your work hours or days that you submit to your umbrella company or agency so they can bill the client and handle your payment.

Umbrella Employment

This employment model enables contractors to receive payroll services while working through temporary jobs. Umbrella companies administer taxes, payroll, pension handling and provide statutory employment rights.

Weekly/Monthly Pay Cycle

The payment schedule for umbrella workers follows a weekly or monthly system based on their agency or client's payment method to the umbrella company. Payment processing begins once they receive the funds.

Workplace Pension

Your umbrella company must auto-enrol you in a pension scheme when you meet the eligibility criteria. You make your contributions from your gross income while the umbrella company might also add funds.

Final Thoughts

Umbrella company jargon can be confusing, especially if you're new to contracting or weighing up your options. This glossary is designed to give you clear, simple explanations so you can better understand how umbrella companies work and what to expect. At Compare Your Pay, we're here to help you make informed choices – whether you're comparing providers, checking fees, or exploring other ways to work.