Understanding an umbrella company calculation: a short breakdown

Understanding an umbrella company calculation: a short breakdown

Before registering with an umbrella company, it’s common for temporary workers to request an umbrella company calculation to get a better understanding of take-home pay retention. However, before shopping around for an umbrella company that ticks all of your boxes, it’s crucial you understand how umbrella companies work, and how umbrella company calculations are generated. Keep reading for more information.

All umbrella companies process payroll in the same way – PAYE

If you’re a regular visitor to umbrellacompanies.org.uk, you’ll notice we say the following a lot. But here goes:

All umbrella companies process payroll in the same way – by following Pay As You Earn (PAYE) – HMRC’s tax system for gathering income tax and National Insurance Contributions (NICs).

To put this into perspective, if a contractor approached two umbrella companies with the same margin (£25, for example), the contractor should expect to retain the same pay from each umbrella company – to the penny.

Be prepared for varying calculations because some umbrella companies play dirty

Despite all umbrella companies processing payroll in the same way, some are offering significantly varying calculations to temporary workers. Why is this happening? Let us explain.

If a contractor is unfamiliar with umbrella companies, it’s natural to shop around and request multiple take-home pay calculations – to get an understanding of their pay potential. Therefore, some umbrella companies are seeing this as an opportunity to inflate their projections – essentially to trick workers into registering with them over the competition. It’s sneaky, but in some cases, it appears to be working.

Umbrella companies that inflate their calculations will frustrate workers in the long run. When it comes to payday – workers will notice that they will retain far less than what they were quoted. However, having registered for an umbrella company – switching could be seen as a hassle, and many people stay put for an easier life. Firstly, this is not the way umbrella companies should be operating, but it’s happening. Secondly, switching umbrella companies is easy (for those who are considering it).

Umbrella company calculators should take numerous variables into consideration

To ensure temporary workers are given reliable and accurate calculations, umbrella companies will consider several variables. When seeking an umbrella company calculation, make sure you’re being given accurate information regarding the following:

Tax code

The tax code used for umbrella company calculations is essential because it can significantly vary pay retention. Most umbrella companies will use the basic PAYE tax code, which is currently 1257L – giving employees the personal allowance of £12,570. However, not every worker will have the same tax code, which may vary based on individual circumstances.

If you are a Scottish worker, your tax code is likely to be different. Please get in touch with an umbrella company directly and make sure they consider this.


The umbrella company margin is taken at gross – but make sure you’re being quoted the gross margin. Some umbrella companies will quote their net margin to make it appear lower than it is (a very unethical and sneaky tactic). Should you find a company doing this – they should be avoided (assuming they’re not transparent about their margin).


When you use an umbrella company, it’s doubtful you can claim tax relief on travel and subsistence expenses. Legislation referred to as Supervision, Direction and Control came into effect in 2016 and effectively stopped most workers able to claim tax relief. To put it simply, HMRC found many umbrella workers had access to tax breaks that full-time employees couldn’t – despite the same working conditions.

Frustratingly, some umbrella companies included expenses in their umbrella company calculations, and they do this to trick workers into thinking they’ll retain more than they actually will.

Working hours

It’s easy for an umbrella company to inflate a worker’s pay retention by manipulating how many hours and days a worker undertakes. For example, a small number of umbrella companies don’t consider bank holidays. They also base calculations on a worker taking no time off throughout the year. When you request a tailored projection, please ensure the figures you’ve given consider your working circumstances.

Student loan repayments

To get the most accurate projection possible, it’s important student loan repayments are included if you’re currently paying one back.

Pension contributions

Umbrella companies are legally required to enrol you into a pension scheme within 12 weeks of using their service. However, it’s entirely up to you whether you remain in the scheme or opt-out. If you want to continue contributing to a pension, make sure contributions are included in your umbrella company illustrations – to give you an accurate indication of your potential pay retention.

Employment costs

Umbrella employees are responsible for the employment costs, and these need to be included in umbrella company calculations. Remember, the employment costs are Employer’s NICs and the Apprenticeship Levy.

The £100,000 abatement

For every £2 an employee earns over £100,000 in a tax year, they lose £1 of their personal allowance. Therefore, umbrella company calculations should reflect this for the higher earners. However, many don’t include the £100,000 abatement.

A new umbrella company calculator is coming soon

The team behind umbrellacompanies.org.uk have been extremely busy building a brand new umbrella company calculator – designed to provide accurate and transparent results for contractors, freelancers and temporary workers. The tool will be free to use, with no limitations to how often you can run a calculation.

For more information, please visit www.umbrellacompanycalculator.co.uk.

Top 10 umbrella companies

If you’re looking for a compliant umbrella company you can trust, you’ve come to the right place. We’ve collated a top 10 umbrella companies list, and we’re confident you’ll find it helpful. Please check it out – some have special offers at the moment, and every one of the top 10 is accredited by either the FCSA or Professional Passport.

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Click here to see our top 10 umbrella companies!

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