Umbrella payroll is a way of processing pay from a client to a contractor through a third-party company known as an "umbrella company". The umbrella company acts as an intermediary between the contractor and the client or agency, simplifying the working relationships and agreements between them, including pay and other administrative aspects such as arranging deductions for tax and National Insurance to HMRC. Umbrella payroll is often used by individuals who acquire work contracts with various clients and need to consider how they want to receive pay and arrange their tax and National Insurance deductions.

Umbrella payroll is different from PAYE (Pay As You Earn), which is the system HMRC uses to recover taxes from payrolled workers. In contrast, independent workers can work through an umbrella company or a PAYE agency, and in both instances, payroll is run, and tax deductions are made on the workers behalf. However, there are some minor differences between the two.

Umbrella workers are entitled to statutory pay for things like holidays, sick leave, and parental leave. They are also entitled to Statutory Sick Pay (SSP), paid at £99.35 a week for up to 28 weeks of the year, and may be entitled to take maternity or paternity leave and statutory pay. The pay rate an umbrella employee receives is the assignment rate for the contract, minus the umbrellas margin and tax deductions.

In summary, umbrella payroll is a way of processing pay from a client to a contractor through a third-party company known as an "umbrella company." It simplifies the working relationships and agreements between the contractor and the client or agency, including pay and other administrative aspects such as arranging deductions for tax and National Insurance to HMRC. Umbrella payroll is often used by individuals who acquire work contracts with various clients and need to consider how they want to receive pay and arrange their tax and National Insurance deductions. Umbrella payroll is different from PAYE, and umbrella workers are entitled to statutory pay for things like holidays, sick leave, and parental leave.