What is an umbrella company?

An umbrella company employs you as a PAYE worker and handles your tax, National Insurance, pension, and payroll. You do your contract work as normal, but instead of invoicing the client directly, the umbrella company invoices the agency or client on your behalf, deducts tax and NI, takes its margin/fee, and pays you a net salary. You're technically an employee of the umbrella company — which means you get some employment rights (holiday pay, SSP, pension) but take home less than running your own limited company.

How much does an umbrella company cost?

Umbrella companies typically charge £20–£35 per week (£80–£150 per month). This is usually deducted from your gross pay before you receive your salary. Some umbrella companies charge a percentage of your earnings instead — this is generally less transparent and can work out more expensive. Always ask for a clear breakdown of costs before signing up. Be wary of any umbrella company that promises unusually high take-home pay — this often indicates a tax avoidance scheme.

Umbrella or limited company — which is better?

It depends on your contract rate, IR35 status, and how long you plan to contract. Limited company is generally more tax-efficient (you can take a mix of salary and dividends), but it has more admin and costs (accountant, Companies House fees, insurance). Umbrella is simpler — no admin beyond submitting timesheets — but you take home less because you pay full PAYE tax and employee NI. If your contract is inside IR35, an umbrella company is usually the simplest option. If outside IR35, a limited company is typically more tax-efficient.

Is working through an umbrella company safe?

Working through a legitimate umbrella company is perfectly safe and legal. However, you need to avoid non-compliant schemes. Red flags include: promises of 80%+ take-home pay, 'loans' instead of salary, offshore payment arrangements, or deductions labelled as 'travel and subsistence' that you haven't actually incurred. Check the umbrella company is a member of the FCSA (Freelancer and Contractor Services Association) or Professional Passport — these accreditations mean they've been independently audited.

Umbrella Companies Explained — What Contractors Need to Know | PocketWise

If you’re contracting through a recruitment agency, you may need to work through an umbrella company. Here’s how they work, what they cost, and whether they’re right for you.

How an Umbrella Company Works

Step	What happens
1	You find a contract role (usually through an agency)
2	You sign up with an umbrella company as their employee
3	You do the work at the client site (or remotely)
4	You submit your timesheet to the umbrella company
5	The umbrella invoices the agency/client for your work
6	The agency pays the umbrella company
7	The umbrella deducts employer NI, employee NI, income tax, pension, and its fee
8	You receive a net PAYE salary into your bank account

How Your Pay Is Calculated

Deduction	Typical amount	Paid by
Your contract rate	e.g. £400/day	Starting point
Agency margin	Varies (deducted before you see the pay)	Agency
Assignment rate (what umbrella receives)	e.g. £350/day	This is your gross pay before deductions
Employer NI (13.8%)	Deducted from your assignment rate	Umbrella (from your gross)
Apprenticeship Levy (0.5%)	Deducted from your assignment rate	Umbrella (from your gross)
Umbrella margin/fee	£20–£35/week	Umbrella
Gross salary	What’s left after employer costs
Employee NI	8% on earnings £12,570–£50,270	You
Income tax	20% basic, 40% higher	You
Workplace pension (employee)	5% of qualifying earnings	You
Net pay	What you actually receive

Example: £400/Day Contract Rate (Inside IR35)

Item	Amount (per day)	Amount (per month, 22 days)
Assignment rate (after agency margin)	£350	£7,700
Less employer NI (13.8%)	-£43*	-£946
Less Apprenticeship Levy (0.5%)	-£1.60	-£35
Less umbrella fee	-£5.70 (£25/week)	-£108
Gross salary	~£300	~£6,611
Less income tax	-£40	-£880
Less employee NI	-£18	-£396
Less pension (5%)	-£12	-£264
Take-home pay	~£230/day	~£5,071/month

*Employer NI is calculated on the gross salary amount above the NI threshold, not the full assignment rate.

Umbrella vs Limited Company

Factor	Umbrella company	Limited company
Tax efficiency	Lower (full PAYE)	Higher (salary + dividends)
Take-home pay (approximate)	~60–65% of assignment rate	~70–80% of turnover (outside IR35)
Admin	Minimal — submit timesheets	Significant — bookkeeping, accounts, returns
Setup	Instant — sign up and start	1–2 weeks (Companies House, bank account)
Running costs	£20–£35/week umbrella fee	£80–£150/month accountant, plus insurance
IR35 inside contracts	Simple — umbrella handles everything	Taxed effectively the same as PAYE
IR35 outside contracts	Still PAYE — less tax-efficient	More tax-efficient
Employment rights	Holiday pay, SSP, pension	None — you’re a director
Holiday pay	Accrued (12.07% of pay)	No — you manage your own
Pension	Auto-enrolled	Set up your own
VAT registration	Umbrella handles it	You handle registration and returns
Professional indemnity insurance	Usually included	You arrange your own
Best for	Short contracts, inside IR35, low admin preference	Long-term contracting, outside IR35, higher earnings

When Umbrella Makes More Sense

Situation	Why umbrella
Contract is inside IR35	Tax difference is negligible — umbrella is simpler
Short contract (under 3 months)	Not worth limited company setup and costs
You want zero admin	Submit timesheets and get paid — nothing else
Agency requires it	Some agencies only work with umbrellas for inside IR35 roles
First time contracting	Try it before committing to limited company

When Limited Company Makes More Sense

Situation	Why limited
Contract is outside IR35	Significant tax savings through salary + dividends
Long-term contracting (12+ months)	Setup costs amortised over longer period
Higher daily rate (£400+/day)	Greater tax savings at higher earnings
Multiple clients	More flexibility in how you manage income
You want to build a business	Retained profits, business expenses

What to Look for in an Umbrella Company

Feature	What to check
FCSA or Professional Passport accredited	Ensures compliance and independent auditing
Transparent fee structure	Fixed weekly fee, no hidden deductions
Clear payslips	Should show all deductions including employer NI
No tax avoidance schemes	No “loans,” offshore arrangements, or unrealistic take-home promises
Pension auto-enrolment	Must be included by law
Holiday pay	Should accrue or be included in hourly rate
Quick payment processing	How quickly after timesheet submission do you get paid?
Insurance included	Professional indemnity and public liability

Red Flags — What to Avoid

Red flag	Why it’s dangerous
“Take home 85%+” promises	Almost certainly a tax avoidance scheme
Payments described as “loans”	Loan charge scheme — you’ll owe HMRC the tax
Offshore payment arrangements	HMRC targets these aggressively
Flat-rate expenses without receipts	Non-compliant — you can’t claim expenses you didn’t incur
No employer NI on your payslip	They may not be paying it (illegal)
Percentage-based fees	Less transparent; can be very expensive at higher rates
Pressure to sign quickly	Legitimate companies give you time to review
Not FCSA or Professional Passport accredited	No independent compliance verification

IR35 and Umbrella Companies

IR35 status	What it means for you
Inside IR35	You’re taxed as an employee — umbrella company is the simplest route
Outside IR35	You can use a limited company for better tax efficiency
Who determines status?	The end client (for medium/large businesses) since April 2021
Can you challenge the determination?	Yes — you have the right to dispute it with the client

Holiday Pay Through an Umbrella

Method	How it works
Rolled-up holiday pay	12.07% added to your hourly/daily rate — no separate paid time off
Accrued holiday	Holiday pay builds up — you request paid time off from the umbrella
Which is better?	Rolled-up gives you higher pay per day worked; accrued gives you actual paid leave