The post-Christmas blues have well and truly kicked in; work clothes don’t fit; the temperature is dropping and being paid early in December means you’re skint now… it’s true that January is truly one of the worst months of the year!

So what better way than to lighten the mood than by briefly explaining in a fun and concise way (ahem!) how the umbrella payroll model works; so hang onto your hats!!

First of all, having been a contractor in my younger days at an umbrella company when a career in payroll was just a glimmer in my eye, I had no idea how any of it was worked out.  I received a basic sign up email and I’m sure they will have gone through the details but at the time it was all a bit of a blur and I just wanted to get paid so it probably went in one ear and out the other.  From working on the other side I could see exactly why… as someone who understands the multitude of differing umbrella models that are out there I sometimes forget how complex these can be for a lay person especially when trying to give the information in a ten minute phone call.

I’m sure every customer facing staff member at an umbrella company has heard the queries:

“Why am I paying two lots of National Insurance?”

“Why have I not received all of my expenses?”

“What is a margin?”


I’m sure most people who are working in the umbrella sector this post will be like teaching grandmother to suck eggs, but here goes nothing.


The first and most important thing to remember is that the rate received from the agency is not the “true” pay rate. It is the “umbrella” rate which is inclusive of holiday pay (I’ll come back to that…) and any employment cost that the umbrella company is passing on.  The reason this is done is simply because, the employment cost on an individual basis is far higher than the margin taken for processing the pay, so if these were not passed on through the supply chain then the umbrella company couldn’t afford to function.


Which employment costs are passed on varies from company to company and size of company, but the most basic ones are:

  • Employer’s NICs
  • Employer’s Pension
  • Apprenticeship Levy (this is relatively new and smaller companies who fall under the threshold may not pass this charge on)


The holiday pay element of the umbrella rate that I alluded to earlier is based on how many days holiday the person would have got had he been perm with the end client; in most cases 28 days – which translates to an uplift of about 12.07%


This means in a very basic sense that to get the umbrella rate – you take the PAYE rate, uplift for the holiday pay, and then uplift for all employment costs.



When payroll is run for the individual it is important to note that the basic rate and holiday are sacrosanct and cannot be touched. (Unless they are on a self-employed as PAYE model whereby the contractor is deemed self employed, but processed as PAYE and as such minimum wage, holiday pay, pension etc. doesn’t apply).


Once the basic rate (hours worked x NMW) and holiday pay is calculated (add employment costs on the assingment on top of this), what remains is a bit more fluid.




It is from this amount that the margin is now taken, and if the person is eligible to claim expenses, these are deducted off (don’t panic, they will be added back later) and the remining is a mix of taxable wage, holiday pay and employment costs.  The holiday pay and employment costs at STEP 2 are added to those at STEP one and thus display on payslip and income statement.  The remaining taxable can be displayed in several ways such as “additional taxable wage”.




From these, employee deductions are calculated and added to the payslip and income statement.




Finally, expenses are added back on and get added onto the net pay (this effectively gives the contractor tax relief on them).


That in a nutshell is the basic payroll calculation and although not easy for me to explain in writing (I’m a spreadsheet kinda guy), that should give more meaning to the numbers on the payslip.


If you would like any more information on umbrella company software and the various models we can operate please don’t hesitate to contact us!


…Anyway enough of all that… its only 49 weeks until Christmas! Best get busy!


 This weeks blog was brought to you by Matt Jennings