Answers · UK 2025/26

What deductions come out of my pay through an umbrella company?

Working through an umbrella company means your assignment rate is reduced by the umbrella's margin (a fixed fee, often £20-£30 a week), then employer National Insurance and Apprenticeship Levy (where applicable) are deducted before arriving at your gross taxable pay, from which normal Income Tax, employee NI, and pension contributions are then also deducted.

Last updated: 1 July 2026Last reviewed: 1 July 2026How we verify

Full answer

Umbrella companies act as the legal employer for contractors and temporary workers, typically those engaged through a recruitment agency on assignments deemed 'inside IR35,' and the pay journey from the agreed assignment rate to your actual take-home pay involves several deduction layers that often surprise first-time umbrella workers. **Step 1: the umbrella's margin** The umbrella company deducts its own fixed margin (fee) for administering your employment, commonly in the range of £20-£30 per week (or a monthly equivalent), regardless of how many hours you worked that period. This is the umbrella's payment for handling payroll, insurance, and employment administration. **Step 2: employer costs deducted BEFORE your gross pay** This is the step that most surprises contractors moving from a limited company or direct employment: because the umbrella is your legal employer, it must pay Employer's National Insurance (15% above the Secondary Threshold) and, if applicable, a contribution toward the Apprenticeship Levy (0.5%, though most umbrella employees fall under an employer's specific arrangement rather than triggering this individually) from the assignment rate BEFORE arriving at what is quoted to you as your 'gross taxable pay.' This means the headline day rate or assignment rate you agreed with the agency is NOT the same as your gross pay for tax purposes -- employer NI comes out of the assignment rate first. **Step 3: normal employee deductions** From the resulting gross taxable pay figure, the umbrella then deducts Income Tax (via PAYE, using your tax code), employee National Insurance (8% above the Primary Threshold, 2% above the Upper Earnings Limit), and any pension contributions (many umbrellas auto-enrol workers into a pension scheme unless you opt out) -- exactly as a normal employer would. **Worked example** A contractor agrees an assignment rate of £500 a day with their agency, working through an umbrella company. After the umbrella's £25 weekly margin and Employer's NI (roughly 15% on the relevant portion above the threshold) are deducted from the gross assignment income, their actual gross taxable pay for tax purposes might be reduced to the equivalent of roughly £430-£450 a day, BEFORE Income Tax and employee NI are then also deducted from that reduced figure -- leaving considerably less take-home pay than a naive £500 x working days calculation would suggest. **Why this trips people up** Contractors quoted a day rate by a recruitment agency sometimes assume that rate is their gross pay for tax purposes, not realising that employer NI, the Apprenticeship Levy contribution (where relevant), and the umbrella's margin all come out of that headline rate BEFORE their own Income Tax and employee NI are calculated -- meaning true take-home pay can be meaningfully lower than expected. Always ask for (or calculate independently using) a full breakdown from assignment rate down to net pay before accepting an umbrella arrangement, and compare the same assignment rate under a genuine limited company (outside IR35) structure if that option is available, since the tax treatment can differ substantially.