Contractor Pay Guide

So, What Exactly is an Umbrella Company?

Think of an umbrella company as a sort of specialised employer for contractors. When you join one, you become their employee for the duration of your Inside IR35 contracts. They handle all the payroll faff – invoicing your client or agency, and then paying you like a regular employee, complete with payslips and all the necessary tax deductions.

It's a neat solution if you're doing contract work that HMRC sees as employment, as it takes the headache of managing complex tax affairs off your plate. We've got a bit more detail on this in our guide on Choosing Your Trading Structure if you fancy a deeper dive.

How Do Umbrella Companies Keep You IR35 Compliant?

It's all about how your pay is processed. When your end client (or agency) decides your contract is Inside IR35, the umbrella company steps in to make sure everything lines up with employment tax rules. Here's the usual flow:

1. Your client or agency pays the umbrella company the agreed rate for your services (often called the 'assignment rate').
2. The umbrella deducts its margin (their fee for doing all this).
3. Then, they deduct all the necessary 'employment costs'. This is a big one: it includes Employer's National Insurance, the Apprenticeship Levy (if it applies to them), and any employer pension contributions. These are costs that an employer normally pays, and in the umbrella setup, they're covered from that assignment rate.
4. What's left after these deductions is your 'gross pay for tax purposes'.
5. From this gross pay, the umbrella deducts your Income Tax (PAYE) and your Employee's National Insurance, just like any other employee.
6. You then receive your net pay into your bank account, along with a payslip detailing everything.

Because you're being taxed as an employee through this PAYE system, HMRC is happy – you're fully compliant with IR35 rules for that particular contract. Simple as that!

Want to see how this looks in numbers? Check out our Umbrella Payslip Explainer for an illustrative breakdown.

Picking a Good Umbrella: What to Look For

Not all umbrella companies are created equal, so it pays to choose wisely. A good, compliant umbrella company is your friend here. Here's what to keep an eye out for:

• Reputation and Accreditation: Look for well-established companies. Accreditations from bodies like FCSA (Freelancer & Contractor Services Association) or Professional Passport are good signs they're committed to compliance.
• Clear Payslips: Your payslip should clearly show all deductions – the assignment rate, the umbrella margin, all employment costs, and your personal tax deductions. No funny business!
• Realistic Take-Home Pay: If an umbrella promises take-home pay that seems too good to be true (like 80-90% of your contract rate for an Inside IR35 role), steer clear. These are often signs of non-compliant tax avoidance schemes, which could land you in hot water with HMRC down the line.
• No "Loans" or "Annuities": Avoid any scheme that mentions paying you via loans, annuities, or other complex arrangements instead of straightforward PAYE salary. These are red flags.

The Upsides of Using an Umbrella for Inside IR35 Gigs

While it might mean a bit less in your pocket compared to an Outside IR35 setup, using an umbrella for Inside contracts has its perks:

• Simplicity: It's generally very low admin for you. Submit your timesheets, and the umbrella handles the rest. Bliss!
• Statutory Rights: As an employee of the umbrella, you're entitled to things like statutory holiday pay, sick pay (though conditions apply), and maternity/paternity pay. Holiday pay is often "rolled-up" into your rate, meaning you get it with each payment.
• Continuity of Employment: Having one continuous employer (the umbrella) can be helpful when applying for mortgages or loans, as it looks more stable than lots of short PSC contracts.
• Pension Access: Umbrellas will auto-enrol you into a workplace pension, and many offer salary sacrifice options, which is a very tax-efficient way to save. Check out our article on pensions and salary sacrifice.

Any Downsides? Let's Be Honest...

It's not all sunshine and rainbows, of course. Here are a few things to keep in mind:

• Lower Take-Home Pay: Compared to a genuinely Outside IR35 contract run through your own limited company, you'll likely see less net pay. This is because you're paying both employee and (effectively, via the assignment rate) employer taxes.
• The Umbrella's Margin: They've got to make a living too! Their fee will be deducted from your earnings. This is usually a fixed weekly or monthly amount.
• Less Financial Control: You don't have the same flexibility over your finances as you would running your own PSC (like deciding on salary vs. dividends or claiming a wide range of business expenses).
• Understanding Deductions: It can sometimes be confusing to see how the initial client rate translates to your net pay because of those employment costs (Employer's NI, Apprenticeship Levy) being deducted before your gross pay is calculated. Our Umbrella Payslip Explainer can help with this.