Understanding Umbrella Company Deductions [Sponsored Editorial]

Understanding Umbrella Company Deductions [Sponsored Editorial]

The following editorial has been written for umbrellacompanies.org.uk by Umbrella Company UK – an FCSA accredited umbrella company.

Umbrella company deductions are single handily the cause for most confusion to contractors and freelancers – and it’s no surprise. While using an umbrella company is very similar to permanent employment (PAYE), there are some significant differences. At Umbrella Company UK, we make sure everyone who enquires about our service understands exactly what’ll be deducted from their pay, and we include a lot of information on our website. So when the opportunity arose to write a blog for the umbrellacompanies.org.uk community – we were delighted to get involved!

The following article will provide an overview of the umbrella company deductions that will appear on your payslip. And, we’ll even include the ones that might not (with an explanation). We hope you find it useful.

Income Tax

When you use an umbrella company, the umbrella will become your employer. As your employer, the umbrella will operate PAYE. PAYE is an HMRC tax system, and it ensures income tax and National Insurance Contributions (NICs) are taken and sent to HMRC before employees are paid their net salary. As a result, umbrella company employees will see income tax on their payslips.

Employee’s National Insurance

By using an umbrella company for your payroll, you are an employee of theirs. Therefore, it should come as no surprise that you’ll see a deduction on your payslip for Employees NICs.


Umbrella companies will deduct a margin from your gross pay and this will cover their involvement in processing your payroll. The margin is the only income that umbrella companies retain for themselves, and it covers administration, staff costs, business overheads, and more.

Umbrella company margins usually vary between £15 and £25 per week, but we’ve noticed some providers are charging upwards of £30. The lower the margin – the more of your pay you’ll retain. However, we like to remind our clients that a margin that is a couple of pounds lower than another won’t make much difference. But we appreciate that a number of contractors want to find a reliable umbrella company that offers a margin lower than the competition.

Umbrella Company UK is currently running a special promotion for all umbrellacompanyies.org.uk readers. For a limited time only, you can join our industry-leading umbrella for only £10 per week. You’ll really struggle to find a better deal from an FCSA accredited umbrella! Please click here to find out more. We’d be delighted to welcome you to our service.

Employer’s National Insurance

Employer’s NICs is an employment cost and one of the most debated deductions you’ll see on your payslip. There is a common misconception that umbrella companies should be paying the Employer’s NICs – because technically speaking, they’re your employer. However, umbrella employees don’t actually undertake any work for their umbrella company. Instead, they go and work for their end client. The umbrella is responsible or processing payroll, and the only income the umbrella generates is through the margin they retain each pay frequency. As a result, it’s impossible for umbrella companies to cover the Employer’s NICs. If they did, they’d be operating at a significant loss, and simply put – wouldn’t exist.

As an employment cost, the Employer’s NICs should be accounted for in the rate of pay a contractor agrees with their agency or client. What this means is that if you’re required to use an umbrella company, your assignment rate should be increased to account for the Employer’s NICs which will be deducted from your pay. You are not expected to be short-changed as a result.

We’ve noticed many agencies offering different pay rates for the same assignment. If the contractor decided to use an umbrella company – they’ll benefit from a higher rate to account for the Employer’s NICs. And, whilst we’re discussing employment costs, there is another one to take into consideration – the Apprenticeship Levy…

The Apprenticeship Levy

The government introduced the Apprenticeship Levy as a new way to fund apprenticeship training for employers, and it came into practice in 2017. Every employer with a wage bill of £3 million or more must pay the Apprenticeship Levy, which is calculated at 0.5% of the total wage bill.

Umbrella companies have hundreds, if not thousands of contractors on their payroll. Therefore, even smaller umbrella companies are eligible for the Apprenticeship Levy. However, as mentioned earlier, umbrella employees don’t work for the umbrella and as a result, umbrella companies simply cannot afford to cover the Apprenticeship Levy. Therefore, just like the Employer’s NICS, the Apprenticeship Levy is passed on to the contractor and will be shown on payslips. Initially, this may sound unfair – just like the Employer’s NICs. However, contractors who use umbrella companies for their payroll should have an uplift in their assignment rate to take the Apprenticeship Levy into consideration.

Holiday Pay

Any money you want to put towards holidays and annual leave should be accounted for in your agreed rate of pay with your recruitment agency or client. An umbrella company must legally show Holiday Pay on your payslip – because they’re your employer. Therefore, the Holiday Pay you’ll see on your payslip is simply a reallocation of your own funds (12.07%) – meaning you are not any better or worse off.

When you see Holiday Pay on your payslip – just remember it’s come from your gross pay. It is not an additional deduction (you’re not losing 12.07%), and it’s not an additional payment, or “bonus” (meaning you’re not being given an additional 12.07% on top of your gross salary). Some of our clients have let us know that Holiday Pay can cause confusion. Unfortunately, showing Holiday Pay is a legal requirement and we have to go about it in this way.

Pension Contributions

As your employer, umbrella companies are legally required to enrol you into a pension scheme. Usually, they’ll have a “preferred” pension provider, and all the information you need should be provided before you register with them. You do not have to contribute towards a pension if you don’t want to, but the umbrella has to enrol you. Opting out of pension contributions should be straightforward and your umbrella will be able to help you.

If you decide to opt out of pension contributions, you will not see any deductions on your payslip for your pension.

Student Loan Repayments

If you are required to pay back a student loan (type 1 or type 2), you will see Student Loan Repayments on you payslip. If you do not pay back a student loan, no deductions will appear on your payslip.


There is a lot of information to take on-board when you register with an umbrella company – especially when it comes to getting your head around the umbrella company deductions on your payslip. Initially, it’s a lot of information to sink in. However, once you’ve understood the deductions – you’re good to go! The biggest area of concern for contractors is typically the employment costs (Employer’s NICs and the Apprenticeship Levy) – and this is no surprise.

When it comes to our approach with contractors – being completely transparent and explaining everything thoroughly is a priority. Our Sales Team are always keen to run through a comprehensive take home pay illustration for everyone who enquiries about our service. And, more information is provided throughout the registration process. We even have example payslips that we’re delighted to share with potential clients – if they’re interested.

Nobody wants to see deductions on their payslip. However, using an umbrella company isn’t just doom and gloom. You may be responsible for employment costs (which should have resulted in you getting an increased assignment rate), but you’ll also have access to loads of perks too. As an employee of the umbrella, you’ll have Statutory Employee Benefits, including Sick Pay and Maternity/Paternity Pay. And, many umbrellas include extras to ensure you get value for money.

We’re really impressed with the transparent and useful information on the umbrellacompanies.org.uk website, and we recommend you check it out. The Umbrellas Explained page is exceptionally useful. And, as an FCSA accredited umbrella company, we truly value the importance of compliance. It’s wonderful to see that umbrellacompanies.org.uk value the FCSA so highly too. Whichever provider you choose – make sure you pick an FCSA accredited umbrella company.

About Umbrella Company UK

Umbrella Company UK is an FCSA accredited umbrella company dedicated to compliance and customer service. Featured in the umbrellacompanies.org.uk top 10 umbrella companies, Umbrella Company UK was founded by experts with over 20 years’ experience in the contractor payroll sector. To provide an unrivalled service, Umbrella Company UK include plenty of extras in their standard umbrella package. These include £25 million insurance, Same Day Faster Payments, access to an innovative app, referral rewards, a dedicated Account Manager, and more! To visit the Umbrella Company UK website, please click here.

Do you represent an umbrella company or organisation that engages with contractors and freelancers? It would be great to feature you on our blog so that you can share your expert knowledge with our target audience. You’re welcome to write about umbrella company deductions, or any topic that contractors and freelancers will find beneficial. To find out more about contributing with an editorial, please visit our Get Involved page.

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