Here are some key terms you’ll come across if you work via an umbrella company.
Apprenticeship Levy
This Levy is charged by the government to fund apprenticeships. As umbrella companies have large wage bills, they must pay 0.5% of their annual salary bill each year. This sum is deducted from your assignment rate. Find out more here.
Assignment Rate
The assignment rate is the amount your client or agency pays to your umbrella company. Your gross pay rate is uplifted to include employment costs, such as employers’ NI, the Apprenticeship Levy, the umbrella margin, and employers’ pension contributions. Find out more here.
Auto-Enrolment (Pensions)
All umbrella companies must automatically enrol employees into a workplace pension scheme within 12 weeks of employment. You can opt out of this. Many contractors contribute to a pension scheme via salary sacrifice, or other methods. Find out more here.
Accreditation
If an umbrella provider has been audited to demonstrate compliance with UK tax laws, it will mention any accreditations on its website. The most well-known accreditation is awarded by the Freelancer and Contractor Services Association (FCSA).
AWR (Agency Workers Regulations)
This legislation ensures that agency workers receive the same basic employment rights and working conditions as traditional employees after 12 continuous weeks in the same role. Find out more here.
BACS (Bank Automated Clearing System)
This is the default method of transferring funds between UK bank accounts, typically taking 2-3 working days to process. Most umbrellas now use the Faster Payments method to process pay – as this is often instantaneous.
Continuity of Employment
When you become an umbrella employee, you have an overarching contract with your provider.
When you finish a contract role, you are still employed by the umbrella company, which provides you with continuity of employment – which can be useful for many reasons, including when you need to provide a financial reference.
Contract of Employment
A formal agreement between the umbrella company and the contractor outlining your terms of employment, including any rights you have as an employee.
Dispensation
A now-defunct agreement between some providers and HMRC allowed umbrella companies to process certain expenses without the need to report them on a P11D form.
Employees’ National Insurance Contributions (NICs)
You pay Class 1 employees’ NICs on your gross pay. This is deducted automatically via the payroll system.
Employer’s National Insurance Contributions (NICs)
All employers pay Class 1 NICs on their employees’ pay. For umbrella employees, this cost is deducted from the assignment rate before your gross pay amount is calculated. Find out more here.
Expenses
You may be able to reclaim some business expenses you incur while on contract duty. However, the scope to claim expenses is very limited, thanks to the SDC rules (see below). Find out more.
Faster Payments (FP)
The FP system processes payments instantly or within a few hours, typically on the same day. Many umbrella companies offer this as a quicker alternative to BACS transfers.
FCSA (Freelancer and Contractor Services Association)
A professional body that oversees compliance of umbrella companies and other service providers (such as accountants). Accredited members must meet strict HMRC-compliant standards. All of our partners are FCSA accredited.
Gross Pay
This is the amount of money remaining after employment costs have been deducted from your assignment rate. Gross Pay is then subject to income tax and employee NIC deductions, plus other deductions if you have a student loan, or contribute to a pension.
Holiday Pay
All employees have a statutory entitlement of 5.6 weeks (or 28 days) of paid leave per year.
Umbrella providers process holiday pay in two main ways.
- Accrued Holiday Pay: A portion of the employee’s earnings (12.07%) is set aside and paid when leave is taken or as a lump sum at the end of the contract. Be aware that unscrupulous providers have been known to pocket unclaimed pay.
- Rolled-Up Holiday Pay: This is the preferred method, as holiday pay is included in the contractor’s pay instead of being held back, meaning no separate payment is made when time off is taken.
HMRC (His Majesty’s Revenue & Customs)
This UK government department collects taxes, enforces tax regulations, and oversees compliance within the contractor and umbrella company sector.
Income Tax
Income tax on your gross pay is deducted at source via PAYE (Pay As You Earn). Your umbrella calculates your income tax liability via the payroll and pays HMRC.
IR35
Notorious tax legislation, enacted in April 2000, aimed at ‘disguised employees’ – contractors who work via their own limited companies while acting like traditional employees.
The ‘Off Payroll’ rules (April 2021 for the private sector) made clients responsible for determining the employment status of contractors. Under the original rules, contractors held this responsibility and the tax liability.
As a result, many risk averse clients will only work with umbrella company contractors – as the IR35 (Off Payroll) rules are no longer a consideration.
Key Information Document (KID)
A document that recruitment agencies must provide to agency workers (including umbrella employees) before signing a contract. It details your assignment rate, deductions, and employment conditions. Find out more here.
Margin (Fee)
An umbrella company charges a weekly or monthly fee for its services. This fee covers admin costs and the umbrella company’s profit, usually around £20-£25 per week. Find out more here.
Net Take Home Pay
This is the amount of money an umbrella employee receives after all deductions have been made. Find out how to calculate your net take home pay.
Overarching Contract
An overarching employment contract links several separate contracts, enabling a contractor to become a permanent employee of the umbrella.
Payslip
Every time you are paid (usually weekly or monthly), your umbrella will provide you with a payslip showing your assignment rate, gross pay, net take-home pay, and all the deductions made during the payroll process. Find out more here.
Preferred Supplier List (PSL)
Most recruitment agencies have a list of umbrella companies they work with. In many cases, they’ll insist you choose a provider from the list. Recruiters will only work with providers they believe are fully compliant and have been thoroughly vetted. Find out more here.
Supervision, Direction, and Control (SDC)
If a contractor is subject to Supervision, Direction, or Control (SDC) by a client or agency, they are generally not eligible for tax relief on travel and subsistence expenses. In practice, most umbrella employees are deemed to be under the SDC of their clients. Find out more about umbrella company expenses.
Timesheets
This is a record of your time working for a client. The process for submitting timesheets varies between umbrella companies.
Usually, you must submit the hours you’ve worked via an online portal or mobile app. Sometimes, you still need to manually get signed copies and email them to your umbrella.