A Guide to Umbrella Company Payroll

You might have heard the term ‘payroll’ mentioned, whether that’s at work or even on the news – often in relation to working ‘on’ or ‘off’ payroll.

For contractors and umbrella employees, it’s important that you understand what payroll is, the difference between working ‘on’ or ‘off payroll' and the tax implications of both.

In this article, we’ll cover everything you need to know.

What is payroll?

Quite simply, payroll is the process a business runs when paying its employees. This includes umbrella companies, which also pay umbrella employees in the same way.

How does payroll work?

Regardless of whether payroll is carried out manually or is automated, the process itself tends to look like this:

Your employer records pay and any other income (like bonuses, holiday pay and sick pay) for each employee.
Next, they’ll calculate income tax deductions, National Insurance Contributions (NICs), pension contributions and any other payments, such as student loans. These are deducted from your gross (or pre-tax) pay.
A payslip will then be created for you, which you’ll be issued around the time of being paid. It will have your pay and all deductions detailed.

What is a payroll number?

A payroll number is a unique sequence – of letters, numbers, or a mix of both – assigned to an individual employee, for easy identification.

It acts as an identifier so that employers (including umbrella companies) can accurately track payments and tax deductions for their employees.

What is umbrella payroll?

Umbrella payroll works in a similar way to payroll for other businesses.

This includes payment of project or assignment fees, plus calculating and paying income tax and NICs on your behalf, along with making pension contributions and more.

What is off-payroll?

While umbrella workers operate on the payroll, sole traders or contractors providing their services via their own limited company and outside of IR35 are often referred to as ‘off-payroll’ workers.

These workers are paid in gross, without tax deductions having been made by an employer or fee-paying party. As a result, ‘off-payroll’ workers are responsible for their own taxes.

To summarise, payroll is the process that employers (including umbrella companies) undertake to ensure that employees are paid in a timely fashion, with the correct tax deductions made on their behalf.