Glossary of Terms for Umbrella Companies

Understanding how umbrella companies work—and the jargon that comes with them—can be tricky, especially with the UK’s constantly changing tax and employment rules. This glossary is here to break down the key terms, so you can navigate the world of umbrella companies with confidence and avoid any costly surprises.

Assignment

The work period during which a contractor performs tasks for a client through an agency or directly represents what is known as an assignment. During this assignment period the umbrella company serves as your employer.

Agency (Recruitment Agency)

A recruitment agency assists in connecting contractors to end clients and frequently oversees the link between the client and the umbrella company. The financial chain runs from the client who pays the agency which then distributes funds to the umbrella company which finally compensates the contractor.

Allowable Expenses

You can reimburse business expenses without additional tax obligations. Since 2016 umbrella workers can claim only limited expenses unless they meet the criteria for genuine mobility across multiple workplaces.

Basic Rate Taxpayer

An individual who makes income that ranges from their personal allowance to the higher rate tax limit. When working with an umbrella company as a contractor your tax liability is determined based on your gross earnings through PAYE.

Contract of Employment

Joining an umbrella company requires you to sign their employment contract. Your status with an umbrella company provides you with statutory employment rights which include holiday pay and sick pay as well as pension contributions.

Contractor

A professional who works independently or on a temporary basis provides their services to a client through either an umbrella company or a limited company.

Deductions

These deductions reduce your gross pay before calculating your net pay. Your gross pay undergoes deductions for tax, National Insurance, student loan repayments, pension contributions and may include umbrella margin.

Dispensation

An old term that permitted umbrella companies to exclude specific expenses from reporting. These were removed in April 2016.

Employment Costs

The umbrella company is required to pay employer National Insurance contributions as well as Apprenticeship Levy payments and may need to handle pension contributions. Your gross pay calculation starts by removing these deductions from the assignment rate.

End Client

The organisation where the contractor carries out work tasks physically is known as the end client. The ultimate client typically does not pay the contractor directly.

Fee/Margin

The umbrella company deducts this fee to handle payroll processing and manage your employment details. The fee structure operates on either a weekly or monthly basis which needs to be transparently presented.

Gross Pay

Your gross pay represents your income before personal taxes and National Insurance deductions while accounting for employment costs deducted by the umbrella company.

Holiday Pay

Umbrella workers receive holiday pay which typically amounts to 12.07% of their gross taxable income. You can receive it as part of your weekly wages or as a separate accumulation.

HMRC

His Majesty’s Revenue and Customs is the UK government body that handles tax collection and tax regulation enforcement while addressing tax non-compliance.

Inside IR35

HMRC treats you as a "deemed employee" when it comes to tax matters. Taxes and NIC for inside IR35 workers operate under employment rules which has made umbrella companies an attractive option for such roles.

Key Information Document (KID)

Agencies must provide workers with this mandatory document before starting their assignment. The Key Information Document (KID) gives workers information about how their pay is calculated along with details on who is responsible for payment (such as an umbrella company). the umbrella company).

Limited Company

An alternative to umbrella employment. You must manage your limited company as its director and handle both your taxes and accounting responsibilities. Not always ideal for inside IR35 work.

Margin

The fee charged by the umbrella company for providing its services. The service charge from the umbrella company should remain clear and fair which generally falls between £15 and £30 weekly.

Minimum Wage

Employees working through umbrella companies have a legal right to receive no less than the National Minimum Wage. You should see your net pay after all deductions on your payslip.

National Insurance Contributions (NIC)

Employee NIC comes out of your gross pay while your umbrella company takes Employer NIC from the assignment rate before gross pay calculation.

Net Pay

Your take-home pay results from subtracting tax along with National Insurance contributions, student loan repayments and pension contributions from your gross earnings.

Off-Payroll Working Rules (IR35)

The rules assess if contractors operate as self-employed individuals or must be treated as employees for tax purposes. When working under IR35 conditions contractors frequently utilise umbrella companies to manage their employment setup.

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 PAYE (Pay As You Earn)

PAYE represents the system through which employers withhold Income Tax and NIC from employee wages. Umbrella workers face taxation through the PAYE system similar to standard employees.

Pension Contributions

Umbrella companies have to automatically enroll qualifying employees into their workplace pension plans. Opting out is possible but legally you must receive the pension offer.

Personal Allowance

The Personal Allowance represents the maximum income you can receive tax-free in a particular tax year. For 2024/25, it’s £12,570. Income above this is taxed.

PSL (Preferred Supplier List)

There are certain agencies or clients who mandate contractors to work through an umbrella company selected from an approved list. The process aims to minimise risk while maintaining proper adherence to regulations.

Real-Time Information (RTI)

Umbrella companies submit your income information to HMRC upon each payment to keep tax records current.

Salary Sacrifice

A salary sacrifice agreement involves decreasing your gross income to receive non-monetary benefits like greater pension contributions. This can save tax and NIC.

Statutory Rights 

Employees of umbrella companies receive legal benefits which include Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), and holiday pay entitlements. These are part of the employment contract.

Subsistence Expenses

The expenses for meals and lodging when working outside of your home. The majority of umbrella employees do not qualify for expense claims unless their work assignment is temporary and fulfills stringent requirements.

Take-Home Pay

Your bank balance reflects all deductions from your salary. Umbrella companies which make promises of high take-home pay should be looked at with suspicion because they may indicate tax avoidance.

Tax Code

The tax code informs your umbrella employer about the amount of tax-free income you qualify for. HMRC provides an alternative code if necessary but the default tax code remains 1257L.

Umbrella Company

This type of intermediary organisation employs contractors and processes their payments through PAYE. The umbrella company processes tax payments along with National Insurance contributions and employment rights protections to provide an easy solution for contractors working under IR35.

Umbrella Payslip

The weekly/monthly payslip from your umbrella company displays both your assignment rate and deductions including employer costs along with your gross pay and final net take-home pay.

VAT (Value Added Tax)

VAT appears on invoices from umbrella companies when they bill agencies or clients. Your pay remains unaffected by this process which forms part of the umbrella company's overall invoicing system.

Weekly Rate vs. Hourly Rate

Your employment contract determines whether you receive payment on an hourly or weekly basis. The umbrella calculates your pay by subtracting their margin and employment costs from your specified rate.

Zero-Hours Contract

Certain umbrella companies operate with zero-hours contracts which fail to provide any guaranteed work hours. Some umbrella companies provide continuous employment contracts that typically deliver greater job stability.

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