The advertised rate is not a salary, and HMRC prices the gap themselves
From HMRC's published worked example: a £25 an hour assignment rate over 37 hours is £925 paid to the umbrella, and the worker's rate of pay is £18.89 an hour. Their words, not an interpretation: "reduced from £25 assignment rate due to company costs and holiday pay."
That is a fall of roughly a quarter before a single penny of income tax is calculated, because the assignment rate includes the employer's costs:
- The umbrella company's margin
- Employer National Insurance at 15%
- The Apprenticeship Levy at 0.5%
- Your holiday pay, shown separately
Only what survives that becomes your gross pay, and only then do PAYE and employee National Insurance apply to it.
Which is why the usual comparison is invalid before it starts
A contractor weighing a £500 a day umbrella assignment against a £500 a day limited company contract is comparing a figure that includes the employer's costs against one that does not. They are not the same £500 and no amount of careful tax arithmetic afterwards fixes that.
Every calculator that treats the assignment rate as a salary is wrong before it begins, and it is wrong in the direction that flatters umbrella. A valid comparison has to start from the assignment rate on both sides, which is what this one does.
Employer National Insurance is not your deduction
This is the other half of the confusion, and it runs in the opposite direction.
It is unlawful for an umbrella company to deduct employer's National Insurance from a worker's gross pay. Where it appears on your reconciliation statement it is an employer-side cost being itemised for transparency, taken out of the assignment rate before your gross pay exists.
HMRC acknowledges plainly that showing it on the payslip routinely misleads workers into believing they are paying their employer's contributions. The deductions taken from your gross pay must be employee contributions only: PAYE, employee National Insurance, pension, student loan.
So contractors manage to be wrong in both directions at once. They overstate what umbrella pays by treating the assignment rate as a salary, and then understate it again by believing they personally pay employer NI.
Rolled-up holiday pay, and when it is lawful
Rolled-up holiday pay at 12.07%, which is 5.6 weeks of statutory leave over 46.4 working weeks, is lawful only for irregular hours workers and part-year workers, and only for leave years beginning on or after 1 April 2024.
An irregular hours worker is one whose paid hours in each pay period are wholly or mostly variable under the contract. If your hours are fixed, holiday pay should be accrued and paid when you actually take leave. Where it is rolled up it must be paid at the same time as the pay for the work and shown as a separate line on the itemised pay statement.
The practical point is that rolled-up holiday pay is part of your gross pay rather than an extra on top. Taking a week off costs you a week's income unless you have deliberately set that money aside, which is a very easy thing not to do.
This is a tax comparison, not a status decision
Whether you may use a limited company at all is decided by the off-payroll working rules, and where the end client is a medium or large private company or any public authority, they determine your status rather than you. Inside IR35 through your own company removes most of the advantage shown here, and many agencies refuse to engage limited companies at all to avoid the risk.
Before signing anything, ask the recruitment agency for the key information document. It is the agency's duty to provide it, it cannot be passed to the umbrella, and it must state the minimum assignment rate and exactly what the umbrella will deduct. If nobody will produce one, that is itself informative.
Common questions
Why is my pay so much lower than the advertised rate?
Because the advertised figure is the assignment rate, which is what the agency pays the umbrella company, not what the umbrella pays you. It has to fund the umbrella’s margin, employer National Insurance at 15%, the Apprenticeship Levy at 0.5% and your holiday pay before your gross pay exists. HMRC’s own worked example turns a £25 an hour assignment rate into an £18.89 an hour rate of pay.
Am I paying my employer’s National Insurance?
No, and it is unlawful for an umbrella company to deduct employer’s NI from your gross pay. Where it appears on your reconciliation statement it is an employer-side cost being itemised, taken from the assignment rate before your gross pay exists. HMRC acknowledges outright that showing it on the payslip routinely misleads workers into thinking they are paying it. The deductions from your gross pay must be employee contributions only.
Can I compare an umbrella day rate against a limited company day rate?
Not directly, and this is the mistake that makes most comparisons meaningless. One figure includes the employer’s costs and the other does not. A £500 a day umbrella assignment is not equivalent to a £500 a day limited contract, because a limited company invoices the whole rate with no umbrella taking a margin or funding employer NI out of it. A valid comparison starts from the assignment rate on both sides.
Is rolled-up holiday pay allowed?
Only for irregular hours workers and part-year workers, and only for leave years beginning on or after 1 April 2024. An irregular hours worker is one whose paid hours each period are wholly or mostly variable under the contract. If your hours are fixed, holiday pay should be accrued and paid when you take leave rather than rolled into your rate. Where it is rolled up it must be paid at the same time as the work and shown as a separate line on the payslip.
So should I use a limited company instead?
That is a status question before it is a tax one. Where the end client is a medium or large private company, or any public authority, the off-payroll working rules mean they decide your status, not you. Inside IR35 through your own company removes most of the advantage. Plenty of agencies also simply refuse to engage limited companies to avoid the risk.
What is a key information document and who provides it?
A document setting out the minimum assignment rate and exactly what the umbrella will deduct. It is the recruitment agency’s duty to issue it, not the umbrella’s, and the agency cannot pass that responsibility to the umbrella. If nobody will give you one, that in itself tells you something about the arrangement.