Umbrella payroll companies like People Umbrella offer a convenient solution for contractors to manage their finances. They not only streamline payment processes but also offer additional benefits such as support with tax compliance, access to employee benefits, and professional guidance on financial matters.
By leveraging these services, contractors can optimise their financial management and feel confident that their assignment and pay is above board and compliant.
However, the payslip and deductions can be confusing, particularly when first starting out as a contractor. So, here’s a comprehensive guide on how Umbrella companies operate and the crucial difference between assignment rate and gross pay.
How You Get Paid:
- Submitting Your Timesheet: Your journey starts with you submitting your timesheet to the recruitment agency. This triggers the billing process with the client.
- Payment to Umbrella Company: Once the recruitment agency bills the client, they transfer the agreed rate to the umbrella company. This rate is calculated by multiplying your assignment rate by the hours worked and forms the basis of your earnings.
- Payment from Umbrella Company to You: Acting as your employer, the umbrella company takes responsibility for paying you. They disburse your gross pay for the role, a figure typically outlined in the assignment details provided by the recruitment agency.
Understanding Gross Pay Calculation:
- Right to a Payslip: As a contractor, you’re entitled to receive a payslip that transparently shows your earnings.
- Reconciliation Statement: In addition to your payslip, umbrella companies may give you a reconciliation statement. This shows how your gross pay is calculated from the assignment rate.
How an umbrella company works out your gross pay from the assignment rate:
- Payment to Umbrella Company: Upon receiving the payment from the recruitment agency, the umbrella company deducts various expenses to arrive at your gross pay.
- Deductions by Umbrella Company: These deductions include:
- Umbrella company operating costs, often referred to as ‘margin’.
- Employer National Insurance contribution.
- Employer workplace pension contribution.
- Holiday pay: While deducted initially from your assignment rate, it’s later reimbursed when you take holiday and claim paid leave.
- Apprenticeship Levy (if applicable).
Here’s an example of what a payslip might look like:
| Item | Amount |
| Basic Salary (Assignment Rate) | £X,XXX.XX |
| Umbrella Company Operating Costs (Margin) | -£XX.XX |
| Employer NI Contribution | -£XX.XX |
| Workplace Pension Contribution | -£XX.XX |
| Holiday Pay Adjustment | -£XX.XX |
| Total Gross Pay | £X,XXX.XX |
- Resulting Gross Pay: The sum remaining after these deductions constitutes your gross pay.
