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Umbrella companies: what they are and how you are paid through one

7 minute read · 2026-08-28

If you take agency work in construction, healthcare, engineering, driving or IT, sooner or later somebody will tell you that you will be paid through an umbrella company. It is a normal arrangement and not a scam in itself, but it is widely misunderstood, and the misunderstanding usually costs the worker money. This guide explains what an umbrella company is, what should appear on your payslip, and what a bad one looks like.

What an umbrella company actually is

An umbrella company is an employer. You sign a contract of employment with the umbrella, and it employs you across different assignments arranged by one or more recruitment agencies. The agency pays the umbrella an assignment rate for your work, the umbrella runs payroll, deducts income tax and National Insurance through PAYE, and pays you the balance. You are its employee, not the hirer's.

What causes trouble is that the rate quoted to you is often the assignment rate paid to the umbrella, not the gross pay you will be taxed on, and those are two different numbers.

The two payslip problem, explained

Here is the part that surprises people. The assignment rate has to cover everything: your gross pay, the employer's National Insurance contributions, the apprenticeship levy where it applies, employer pension contributions, holiday pay, and the umbrella's own margin. All of those come out of the same pot before your taxable gross pay is worked out.

So if an agency advertises a role at an umbrella rate of, say, £20 an hour, that £20 is not your gross pay. Deduct the umbrella's margin, then the employment costs it must fund, and what remains becomes your gross pay, from which your own tax and National Insurance are then taken. That is why the figure hitting your bank account can look much lower than the headline rate, and it is why a PAYE rate through an agency and an umbrella rate can never be compared directly.

A properly run umbrella will show all of this. You should receive a reconciliation or statement showing the assignment rate received and every deduction made from it, and then a payslip showing your gross pay, your tax, your National Insurance, your pension and your net pay. If you are only ever shown the second document, ask for the first. You are entitled to understand what happened to the money.

What to check on your payslip

  • The margin. A fixed weekly or monthly amount, stated clearly. It should not vary with your hours.
  • Holiday pay. Either accrued and held for you to claim, or paid out with each payslip and itemised separately. Know which arrangement you are on, and if it is accrued, claim it. Unclaimed holiday pay held by an umbrella is the most commonly lost money in the whole system.
  • Employer costs. Employer National Insurance and the apprenticeship levy should be shown as coming from the assignment rate, not deducted from your gross pay after it has been calculated.
  • Anything you do not recognise. Advance fees, joining fees, insurance charges you did not agree to, or a second company you have never heard of appearing on the paperwork.

Rules in this area have been changing, including where responsibility for accounting for PAYE on umbrella payments sits between the umbrella, the agency and the end client. Check the current HMRC guidance on GOV.UK rather than assuming last year's position still holds.

Schemes to walk away from

Tax avoidance schemes market themselves at agency workers constantly, and they use recognisable language. Be suspicious of anything that promises you will keep far more of your pay than normal PAYE allows, that pays you partly through a loan, an annuity, a grant, a credit facility or shares, that splits your pay between two companies, or that describes part of your money as non taxable without explaining exactly which statutory relief applies.

These arrangements do not move the tax liability away from you. HMRC pursues the individual for the unpaid tax, sometimes years later, and publishes a list of named tax avoidance schemes and promoters on GOV.UK. If someone offers you an arrangement like this, check that list first and keep every document you are given.

Umbrella, PAYE or your own limited company

If you work through your own limited company, the off payroll working rules known as IR35 decide whether your engagement should be taxed like employment. For public sector clients and medium and large private sector clients, the client makes that determination and must give you a status determination statement you can dispute. Many businesses respond to that by insisting on umbrella arrangements instead, which is why umbrella employment has become so common in contracting.

Next step: check the deductions on your next payslip line by line, then look at current openings on our job listings. If you are deciding between agency and permanent work, read our guide to permanent and temporary work, or ask us anything on the candidate questions page.