Answers · UK 2025/26

What is an umbrella company and what do they deduct from my pay?

An umbrella company employs contractors on a PAYE basis, taking a client's payment and deducting Income Tax, employee National Insurance, the Apprenticeship Levy, employer National Insurance, holiday pay, and their own margin, before paying the net amount to the contractor as a regular payslip.

Last updated: 3 July 2026Last reviewed: 3 July 2026How we verify

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An umbrella company acts as an employer for contractors, particularly common for those working on assignments deemed 'inside IR35' or who simply prefer the administrative simplicity of PAYE employment over running their own limited company. The contractor's agency or end client pays the umbrella company an agreed rate for the work done, and the umbrella company then processes this through PAYE, similar to any other employer, deducting Income Tax and employee National Insurance at standard rates before paying the contractor their net pay. What often surprises contractors new to umbrella working is the range of deductions taken from the gross 'assignment rate' before it even reaches the point of calculating standard PAYE tax and NI: this typically includes employer National Insurance (15% on relevant earnings above the threshold), the Apprenticeship Levy (a small percentage for larger umbrella companies), holiday pay (often 12.07% of pay, sometimes rolled up into each payment rather than paid separately when leave is taken, or accrued and paid on request), pension contributions if the contractor is auto-enrolled and does not opt out, and the umbrella company's own margin or fee for providing the service, commonly a fixed weekly or monthly amount rather than a percentage. Because employer costs like employer National Insurance are typically deducted from the assignment rate before the 'employee' figures are calculated, a contractor comparing an umbrella assignment rate to an equivalent PAYE salary should understand that the headline day rate is not directly comparable to a salary of the same nominal amount -- it needs to have employer costs and the umbrella margin subtracted first to get a true comparison of take-home pay.