Understanding Umbrella Company Pay: The Contractor's Guide for 2025/2026
Assignment Rate vs. Gross Salary
One of the most common sources of confusion for contractors working 'Inside IR35' is the difference between their assignment rate and their actual gross salary. The Assignment Rate (the rate the agency pays the umbrella) is a business-to-business figure. It must cover all employment costs before your salary can even be calculated. This is why your gross pay on your payslip will always be lower than the headline rate you negotiated with your recruiter.
The 'Employment Cost' Deductions
Before you reach your taxable gross salary, the umbrella company is legally required to deduct the employer's portion of taxes from the assignment rate. For the 2025/2026 tax year, these include:
- Employer National Insurance (13.8%): Calculated on earnings above the secondary threshold.
- Apprenticeship Levy (0.5%): A statutory charge applied to all large payrolls in the UK.
- Umbrella Margin: The fixed fee (typically £20-£30 per week) that the umbrella company keeps to cover their administrative costs and insurance.
Only after these items are removed do you arrive at your Gross Taxable Salary, at which point standard PAYE Income Tax and Employee National Insurance (8%) are applied.
Why Your Net Pay Feels Lower
Contracting through an umbrella company effectively means your rate must fund two "layers" of taxation—both the employer and employee contributions. While this can result in a lower take-home percentage than a permanent role with the same salary, umbrella employment offers benefits such as continuous employment status, consolidated pay from multiple agencies, and full statutory rights (holiday pay, sick pay, and pension). When negotiating your next contract, always aim for an assignment rate that is at least 25-30% higher than an equivalent permanent salary to account for these necessary deductions.
Technical Breakdown Example
On a £400 daily rate, working 5 days a week, your weekly assignment rate is £2,000. After deducting a £25 margin, Employer NI, and the Apprenticeship Levy, your gross taxable weekly pay might be approximately £1,750. From this £1,750, standard PAYE tax and employee NI are deducted to reach your final net take-home pay. Use our calculator to see the precise impact of your tax code and pension choices on this calculation.