Temporary or contract worker
When you work as a temporary or contract worker, you’ll typically be paid either by the recruitment agency or they may outsource the payroll function to an umbrella company. And no, umbrella companies don’t sell brollies, but act as intermediaries, managing payroll for multiple contract workers under one company (or umbrella). If you are working through an umbrella company, it’s important to understand the payment structure and how it effects your take-home pay.
Contract working through an umbrella company
In the UK, umbrella companies function as intermediaries employing contract workers and freelancers who are subject to IR35 legislation. Contractors who do not want to work through a personal limited company can join an umbrella company. An umbrella company deducts PAYE and national insurance from your salary and pays it to HMRC. They will charge a nominal fee for their services of around £15 to £25 per week. As mentioned, some recruitment agencies will outsource the payment of their temporary workers to an umbrella company.
Implications for your rate of pay
Having your salary paid via an umbrella company does have implications for your rate of pay, as you are subject to extra pay deductions. Alongside the standard salary deductions of PAYE, employee’s national insurance, and pension, you will also be liable for the employer’s NI and the apprenticeship levy. Furthermore, if you are enrolled in a workplace pension scheme, you will have to pay the 3% employer’s contribution. It’s important to understand how these extra deductions impact your net pay.
When you are employed by a company as an employee, your employer pays the employer’s national insurance, apprenticeship levy, and the employer’s workplace pension contribution. When you contract through umbrella companies, they do not pay these employer amounts, you do, meaning you need to earn a higher hourly rate to cover these additional costs. In essence, you are a company of one under the umbrella, liable for both the employee and employer payroll deductions.
Calculating your actual hourly rate when working through an umbrella company
When you have a permanent job, you can work out your hourly rate of pay by dividing your annual pay by 260 days. Once you have your daily salary rate, simply divide this by your regular daily hours to get your hourly rate.
As a contractor, to calculate your real hourly rate you’ll need to deduct the employer’s NI and the apprenticeship levy. If you’re enrolled in a pension plan you need to deduct the 3% employer’s contribution too. Assuming a contract of 35 hours per week at a rate of £15 per hour, the calculations are:
| Hourly rate | No of hours worked in week | Gross pay |
| £15.00 | 35 hours | £525 |
| Deductions for a week’s pay | Amount |
|---|---|
| PAYE – £525 less PTA of £241 = taxable pay of £284 x 20% | £57 |
| Employee national insurance – £525 less £242 = £283 x 8% | £23 |
| Workplace personal pension contribution – £525 x 4% | £21 |
| Employer’s national insurance – £525 less £175 = £350 x 13.8% | £48 |
| Employer’s pension contribution – £525 x 3% | £16 |
| Apprenticeship levy at 0.5% – £525 x 0.5% | £3 |
| Umbrella company admin fee | £15 |
| Total deductions | £183 |
In the above example, the contractor’s net pay for the week will be £342. In contrast, a company employee earning the same will receive net pay of £430. As a contractor, you are paying an additional £88 per week in deductions, which equates to £2.50 per hour. You need to deduct this from the contracted rate of £15, which equates to £12.50 per hour or £22,750 a year.
From April 2025, employer national insurance is increasing to 15% and is payable on income over £416 a month or £96 a month. In the above example, the weekly employer’s national insurance contribution will increase from £48 to £64.
Umbrella contracting hourly rates – how much?
To illustrate this further, assume you are working for a company on a salary of £30,000 or £16.48 per hour. You decide to leave your job and work as a contractor through an umbrella company. Given that you must now pay the employer’s NI, pension, and apprenticeship levy, your contracted hourly rate needs to be higher to cover these extra costs. How much does your hourly pay need to increase to match your previous annual salary and net pay?
The answer is £22 per hour, which allows you to take home the same weekly net pay of £446 as if you were a company employee. This is a 34% increase in the hourly rate of pay. A general rule of thumb when contracting is to add 40% to your current rate of pay to cover the extra employment costs.
HMRC has useful calculators for determining the employee and employer national insurance and another for working out PAYE:
HM Revenue & Customs: Class1NICs-1 (hmrc.gov.uk)
HM Revenue & Customs: PAYE-0 (hmrc.gov.uk)
