PAYE Through an Umbrella: What's Deducted and Why?
- Umbrella Search
- Nov 27, 2025
- 6 min read
When you work through an umbrella company, your pay is processed via PAYE (Pay As You Earn) — this is the most common form of taxation in the UK and is in line with how other employees pay tax. But for many contractors, umbrella company payslips can feel confusing, especially if you're used to working on a self-employed basis. It's not always easy to understand what's being deducted from your pay and why.
In this guide, Umbrella Search explains what's deducted from your pay through PAYE and for what reason, so you know exactly where your money's going and can stay in control of your take-home pay.
What is PAYE?
PAYE (Pay As You Earn) is the UK's most common tax system for employees. Through the PAYE system, income tax and National Insurance Contributions are deducted from the contractor's earnings automatically before you're paid. This means there's no time-consuming tax returns or any big tax bill at the end of the year.
So why does an umbrella company use PAYE?
Well, when you use an umbrella company, they employ the contractor. This means that, in turn, they handle all of the PAYE calculations, report your income to HMRC, and deduct the relevant tax and NI directly from your pay before you receive it. As we've already said, this means you don't have to worry about filing any tax returns as everything's taken care of.
What's deducted from your pay?
Let's get to the important part: what's deducted from your pay through PAYE? Next, we'll break down everything that will be taken off your pay so you know what to expect.
Umbrella company fees
Before any taxes are applied, your umbrella company will deduct their fee. This is their service fee for handling your payroll, administration, insurance, and providing you with all the services and benefits you receive.
Every umbrella company charges a fee, and the great news for contractors is that fees remain competitive, standing at around £15-25 per week, depending on which company you choose to work with.
With the fee being taken off before your gross pay, this helps to reduce the tax owed, which is great news for contractors.
Employer's National Insurance
The next thing that will be deducted from your take home pay is Employer's National Insurance.
However, this can be an area of confusion as the umbrella company is your employer, which means they are responsible for paying Employer's National Insurance.
However, not all umbrella companies absorb this cost. Many will deduct it from the contractor's income that they receive. In this case, you'll see it as a deduction on your payslip.
Apprenticeship levy
This is another deduction that may or may not apply to you, depending on which umbrella company you work with.
The Apprenticeship Levy is a 0.5% tax on payrolls over £3 million. Many umbrella companies are large enough to fall under this, and so it's factored into your rate as well. However, if your umbrella company doesn't run a payroll over this amount, then you won't have to worry about this cost.
Like Employer's NI, this is deducted before you receive your gross pay.
Holiday pay
By law, umbrella company contractors are entitled to 28 days paid holiday per year pro-rata. This is usually processed in one of two ways:
Rolled up: Your holiday pay is included in your weekly/monthly pay (usually at 12.07% of gross pay).
Retained: The umbrella holds the money until you request paid time off.
Employee's National Insurance
The next thing to be deducted from your take-home pay is employee's national insurance.
For 2025, employee National Insurance sits at:
8% on earnings between £12,570 and £50,270
2% on anything above that
Income Tax
Next on the list is income tax.
The income tax bands for the 2025/26 tax year are:
0% on the personal allowance (up to £12,570)
20% basic rate (from £12,571 to £50,270)
40% higher rate (from £50,271 to £125,140)
45% additional rate (over £125,140)
Your umbrella uses your pay and tax code to determine how much tax to deduct to ensure you're always paying the right amount.
Pension Contributions
If you're eligible, the umbrella company will enrol you into a workplace pension. You'll contribute a default 5%, with the umbrella contributing 3%.
Contractors can opt out of paying their contributions, but if you stay opted in, this will appear as another deduction on your payslip.
Some umbrella companies will also offer salary sacrifice, which lets contractors contribute to your pension before tax – saving you money overall.
Student Loan
If you've got a student loan, repayments will also be taken automatically via PAYE.
What you'll pay back depends on your repayment plan and how much you earn, however, you will clearly see what's being taken off each month to know what you can expect to pay back.
Why understanding your payslip matters
When you're working through an umbrella company, it's important that your payslip makes sense to you. Every deduction — whether it's tax, National Insurance, pension contributions, or the umbrella company fee, should be clearly laid out, so you always know exactly where your money is going and how much you'll be taking home each month.
Take the next steps with Umbrella Search
If you're looking for an umbrella company to work with, Umbrella Search is here to help.
One of the great many benefits to working with an umbrella company is that they pay you on time each month, all of which you can see on the payslip they'll issue you.
That means you can rest assured that you'll be paid on time, removing any cashflow issues.
For help with finding an umbrella company that's just right for you, Umbrella Search is here to help. Simply get in touch and we'll work with you to find an umbrella company that's just right for you.
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What does PAYE actually mean when I’m paid through an umbrella company?
PAYE (Pay As You Earn) is the UK tax system that deducts Income Tax and National Insurance directly from your pay before it reaches you. When you work through an umbrella company, you become their employee — the umbrella handles all PAYE calculations and submits them to HMRC on your behalf. You simply receive your net salary after all required deductions.
What deductions should I expect from an umbrella company?
Your payslip will usually show:
Umbrella company margin
Employer’s National Insurance
Employer’s pension contributions (if opted in)
Apprenticeship Levy
Holiday pay (rolled-up or accrued)
Employee Income Tax
Employee National Insurance
Employee pension contributions (if opted in)
The umbrella must deduct employer costs before calculating your taxable pay — this is why your assignment rate from the agency is higher than your final gross pay.
Why does Employer’s NI come out of my assignment rate? Isn’t the employer supposed to pay it?
Yes — in normal employment the employer pays Employer’s NI.
With umbrella contracting, the agency or client pays a higher assignment rate specifically designed to cover all employer costs, the umbrella’s margin, and your gross pay.
You never pay Employer’s NI from your personal wages — it comes from the assignment rate, not your salary.
Why is my take-home pay lower than the assignment rate my agency quoted?
Because the assignment rate is not your salary.
It includes all employment costs the umbrella must cover on your behalf.
Once employer costs and the margin are deducted, the remainder becomes your gross taxable salary. After that, PAYE tax and Employee NI are applied.
What is the umbrella margin, and how much should I expect?
The margin is the umbrella company’s fee for running your payroll.
It’s usually around £10–£25 per week, or £60–£120 per month.
A good umbrella charges a fixed, transparent margin with no hidden extras.
Do umbrella companies take a cut of my pay?
No.
Reputable umbrellas only charge their margin.
All other deductions — tax, National Insurance, pension, levy — are statutory and would exist in any PAYE job. If a company takes percentage-based or unusual deductions, that’s a red flag.
What is holiday pay and why is it on my payslip?
As an umbrella employee, you’re entitled to 28 days of paid holiday a year.
Umbrellas either roll it up into your weekly pay or accrue it for you to claim later.
Holiday pay is not an extra deduction — it’s simply displayed separately for transparency.
Why do I see a line for the Apprenticeship Levy?
All large employers with payrolls above £3 million must pay the Apprenticeship Levy.
Umbrella companies fall into this category.
It’s deducted from the assignment rate, not from your personal wages.
Will I pay more tax through an umbrella than I would as a regular employee?
No — Income Tax and National Insurance are exactly the same as any other PAYE employee.
The only difference is that umbrella employment includes employer costs taken from the assignment rate before your salary is calculated.
Can I claim expenses through an umbrella company?
Usually no, unless your contract is outside IR35 and you meet HMRC’s temporary workplace rules.
Most umbrella workers inside IR35 cannot claim travel, mileage, food, or accommodation.
Be cautious of umbrellas offering large untaxed expenses.
Is my tax fully taken care of when using an umbrella?
Yes.
The umbrella company handles all PAYE calculations, NI deductions, employer tax reporting, and submissions to HMRC.
You only need a Self Assessment return if you have additional income outside your umbrella work.
Why does the agency quote me two rates — PAYE rate and umbrella rate?
The PAYE rate is what you’d receive if the agency employed you directly.
The umbrella rate is higher because it includes all employer costs and the umbrella margin.
It’s not your pay — it’s the total cost of engaging you via an umbrella.
How do I know if deductions are correct?
A good umbrella provides a clear breakdown showing how your assignment rate becomes your gross and net pay.
If you ever see unclear admin fees, insurance charges, or “miscellaneous” deductions, ask immediately.
What’s my real take-home pay through an umbrella?
Your take-home depends on your assignment rate, tax code, pension choices, and the umbrella margin.
As a general guide, most inside-IR35 umbrella workers take home around 55%–70% of their assignment rate after all deductions.
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