How umbrella companies work

An umbrella company employs you. The agency pays it your assignment rate, and it pays you a salary through PAYE. For an inside-IR35 engagement this is usually the simplest arrangement: you get employment rights, statutory holiday and a single continuous employment record across multiple assignments.

The critical thing to understand is that the assignment rate is not a salary. It is the total amount the agency pays for your services, and every cost of employing you has to come out of it before your gross pay exists.

The umbrella's margin — the only part it keeps as its fee, typically a fixed amount per week or month rather than a percentage.

Employer's National Insurance — 15% of your gross pay above the secondary threshold in 2026/27. This is a genuine employment cost, not a deduction the umbrella invented, but it is funded from your rate rather than by the agency.

The Apprenticeship Levy — 0.5%, which large employers pay on their whole pay bill and most umbrellas pass on.

Employer pension contributions, if you are enrolled and have not opted out.

Only what remains is your gross taxable pay, and income tax, employee National Insurance and any student loan repayment come out of that.

Employer's National Insurance is charged on your gross pay — but your gross pay is what is left after employer's National Insurance is taken out. Each depends on the other, so the figure cannot be found by simple subtraction.

Many calculators approximate this, or apply the employer rate to the whole assignment rate, which overstates the deduction. PayReckon solves the relationship algebraically, so the gross pay it reports, plus every employment cost calculated on it, adds back to your assignment rate exactly.

Your statutory holiday entitlement is 5.6 weeks, which works out at 12.07% of the hours you actually work. Umbrellas handle it in one of two ways.

Rolled up (sometimes called 'advanced'): the holiday element is paid with every payment. Your take-home looks higher week to week, but nothing is set aside for the weeks you do not work.

Accrued: the umbrella retains the holiday element and pays it when you take leave. Your regular take-home is lower, but the money is still yours — which is why PayReckon shows accrued holiday as leaving your take-home while still counting towards total capital.

Whichever applies, be sure you know which one your umbrella uses, and that accrued holiday is actually paid out when you leave an assignment.

Compare margins on the same basis — a weekly margin and a monthly one are not comparable until you annualise them.

Be wary of any arrangement promising materially more take-home than a straightforward PAYE calculation. Schemes routing pay through loans, annuities or 'advances' have left large numbers of contractors with retrospective tax bills. If the take-home looks too good for the rate, the difference is usually tax that has not been paid yet.