What is Umbrella Payroll? A Guide for Payroll Professionals

The contractor workforce has changed significantly since the April 2021 IR35 reforms. And for payroll professionals managing contractor pay, understanding umbrella payroll – and having the right umbrella payroll software in place – has never been more important.

Whether you’re running payroll for a bureau, an umbrella company or an agency, find out how umbrella payroll works, how it differs from other arrangement, and how umbrella software can support compliant, efficient processing at scale.

What Is Umbrella Payroll?

Umbrella payroll is the process where a third-company party – known as an umbrella company – acts as the employer of record for contractors, temporary workers and freelancers. Rather than those individuals invoicing clients directly or operating through their own limited companies, the umbrella company sits between the end client and the worker and processes all pay, tax and National Insurance deductions through PAYE.

For payroll professionals, this means coordinating timesheets, agency invoices, worker pay and HMRC submissions in a single workflow.

How Does Umbrella Payroll Work?

The purpose of using an umbrella payroll company is to simplify the working relationships and agreements between an employment agency and a contractor, including pay and other administrative aspects, such as arranging deductions for tax and National Insurance to HMRC.

The process typically looks like this:

• The end client or recruitment agency agrees a contract rate with the worker
• The umbrella company raises an invoice to the agency or client for the worker’s services
• The worker is employed by the umbrella company and paid a salary through PAYE
• The umbrella company deducts Income Tax, Employee National Insurance and Employer National Insurance before passing net pay to the worker
• A Full Payment Submission (FPS) is filed with HMRC each pay period.

Who Uses Umbrella Payroll?

Umbrella payroll is commonly used by:

• Contractors working across multiple short-term engagements
• Temporary and agency workers
• Freelancers who prefer not to manage their own limited company administration
• Workers brought inside IR35 following the 2021 off-payroll working reforms

Since the IR35 changes came into effect, many contractors who previously operated through personal service companies (PSCs) have moved to umbrella arrangements – significantly increasing the volume of umbrella payroll processing across the UK’s businesses.

Umbrella Company Margins

The umbrella company will normally deduct a margin from the assignment rate to cover its services, such as administration, employer costs and any benefits offered to the workers. These could include:

• Health insurance
• Life cover
• Accident cover

The contractor pays these margins rather than the client, which is important to know should any support be required when dealing with umbrella companies.

Umbrella Companies

• Act as a continuous employer for the worker across multiple contracts
• Provide statutory employment rights including holiday pay, sick pay and maternity pay
• Can process allowable business expenses
• Do not require re-enrollment with each new contract
• Typically offer a higher gross rate than PAYE agencies

PAYE Agencies

• Process payroll on a contract-by-contract basis
• Must be re-appointed with each new engagement
• Do not typically provide the same level of employment benefits
• Are generally simpler to administer for single-contract or short-term placements.

For payroll professionals managing a large, rotating contractor workforce, umbrella payroll consolidates worker relationships and reduces administrative overhead – provided you have the right umbrella payroll software to support the volume.

Benefits of Umbrella Payroll

Looking at these main differences, it’s clear that choosing the umbrella payroll route has its advantages. When working on a platform that understands a company’s needs, an umbrella payroll software solution can make life easier in the following ways:

1. Simplifies Calculations (Including Benefits)

After communicating all relevant pay information, such as any holiday pay entitlement, apprenticeship levy deductions or even timesheets and other work expenses, an umbrella payroll solution is ready to take care of all calculations for you.

One of the most challenging aspects of running umbrella payroll in the past was the complex calculations. But Staffology’s payroll software features intuitive thinking, designed to eliminate the calculation burden for you. Therefore, this makes more reliable, accurate and transparent calculations – which means quick production of payslips with up-to-date financial information. 

With so many expenses to configure, and managing employee and agency pay-related matters, having a solution that simplifies the likes of agency invoices and employee wages in one place is invaluable.

Discover more about how Staffology performs complex calculations, turning them into hassle-free payslips.

2. Import Data More Easily

If your payroll has the administrative burden of manually inputting employee information, including deductions and expenses, our umbrella payroll solution can help in one of two ways: by connecting to Staffology’s API or importing what you need via CSV file

CSV imports empower you to control what information is driving your payroll outcomes, meaning you have control to specify the data for relevant fields, including invoice values.

3. Reporting (and Learning About Your Payroll Trends)

Aside from performing calculations and importing relevant data, Staffology’s umbrella payroll unlocks one more critical feature: reporting on your payroll habits. This means umbrella companies can generate and review payroll across a session or period of time for analysis. These reports can be created for internal use or as statements for umbrella clients. 

Are Umbrella Companies Outside of IR35?

The UK government has regulations in place known as IR35 or off-payroll working rules. These ensure that contractors, who work similarly to employees, pay the same tax and insurance as they would if they were regular employees.

Contractors paid via an umbrella payroll company do not need to worry about the IR35 rules because the company will take care of all tax and National Insurance payments. Likewise, they will not need to complete a tax return form each year, as most self-employed individuals do.

Find out more about IR35 and off-payroll rules.

How Staffology Software Works with Umbrella Payroll

Staffology provides a cloud-based umbrella payroll featuring an intuitive interface, and our platform is the only one with an API-first application.   

Staffology API Capabilities

The API is at the core of Staffology software. An umbrella payroll company can benefit from our API capabilities, including the option for future scalability (where different applications can communicate) and automation functions.

• Scalability

One of the benefits of using our payroll API is the flexibility to grow and scale how it works for your business. As your company grows, you can scale how you use Staffology by plugging it into other applications, such as accounting software. The API capabilities allow you to push and pull data to and from your Staffology payroll software.

• Automation

If your development resources are limited, taking advantage of our payroll API may not be something your business can immediately afford. However, with automation as a standard practice, Staffology understands how some payroll tasks can feel like a burden. Payroll often remains the same, meaning you’re paying the same employees routinely. With the help of automation, you can remove the time it takes to regularly perform manual tasks, freeing up how you use your resources. You can even benefit from pay runs being automatically finalised, payslip generation (where employees are emailed payslips), and the FPS will be filed with HMRC.

How Staffology Can Help

Umbrella payroll companies are a useful option for a number of contractors who have multiple clients and wish to protect a larger proportion of their income. By choosing Staffology Payroll software to support their payroll processing, umbrella companies in turn support their contractors by ensuring they get paid efficiently and correctly every time. Get in touch to learn more about how Staffology assists umbrella payroll.