How does an umbrella company work and what is deducted from contractor pay?

Full answer

Umbrella companies are intermediary employers used by contractors and freelancers who do not want to run their own limited company. The contractor works for the client but is employed by the umbrella. Money flow 1. Client pays the umbrella an "assignment rate" (gross rate agreed in the contract -- e.g., GBP 550/day) 2. Umbrella deducts: -- Employer NI: 15% on earnings above the Secondary Threshold (GBP 5,000/year from April 2026) -- Apprenticeship Levy: 0.5% of payroll above GBP 3,000,000 (large umbrellas only) -- Holiday pay accrual: typically 12.07% of assignment rate (statutory minimum; some umbrellas roll this into the rate) -- Umbrella margin: typically GBP 15-40/week or GBP 30-80/month 3. Remaining amount is the "gross pay" (also called "uplift" or "gross to gross") 4. PAYE income tax and employee NI deducted from gross pay 5. Net pay transferred to the contractor Illustration: GBP 550/day (22 days/month = GBP 12,100 assignment rate) -- Employer NI (~GBP 1,600) -- Holiday pay (~GBP 1,461) -- Margin (~GBP 120) -- Gross pay: ~GBP 8,919 -- PAYE (40% band example): ~GBP 2,800 -- Employee NI (8%): ~GBP 714 -- Net take-home: ~GBP 5,400 (approx 44% of assignment rate) Compliant vs non-compliant umbrellas HMRC's "disguised remuneration" rules apply to non-compliant umbrella schemes that pay contractors via loans, annuities, or other non-PAYE mechanisms to reduce the apparent taxable income. These are illegal. HMRC pursues the worker for unpaid tax and NI -- not the umbrella -- so contractors bear the full risk. Always verify an umbrella is on HMRC's Approved List (when published) and request a full pay illustration showing all deductions before signing.

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