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The gap between your day rate and your take-home pay is made up of five separate deductions, and most umbrella companies do a poor job of explaining them clearly. This guide walks through every deduction in order, using the actual sequence your umbrella applies them in.

Your day rate is not your salary

The first thing to understand: the rate you agreed with your agency is called the assignment rate or contract value, not your gross salary. It is the amount your umbrella company receives from the agency to cover your pay and their own employment costs as your legal employer.

Say you agree a £450 day rate, working five days a week for 46 weeks. That is £103,500 in contract value paid to your umbrella. Your gross salary, the figure your income tax and employee NI get calculated on, is considerably lower. Here is where the difference goes.

Deduction 1: Employer's National Insurance

Your umbrella company is legally your employer, and employers pay National Insurance on what they pay their staff. For the current tax year, employer NI is charged at 15% on earnings above the secondary threshold of £5,000 a year.

On a £103,500 assignment rate, the employer NI funded out of it works out to roughly £12,669. It is charged on your gross salary rather than on the assignment rate itself, which is why the figure is lower than 15% of the headline contract value. This is not deducted from your gross pay directly. It is deducted from the assignment rate before your gross pay is even calculated, which is why umbrella contractors often feel like they are paying an employer's tax, even though the umbrella is the one legally liable for it.

Deduction 2: The Apprenticeship Levy

Employers with an annual pay bill over £3 million pay the Apprenticeship Levy at 0.5%. Because umbrella companies process payroll for large numbers of contractors, most exceed this threshold and apply the levy across their book. In practice, this typically shows up as a 0.5% deduction charged on your gross salary, funding apprenticeship training you will never personally use.

On this assignment rate, that is roughly £447.

Deduction 3: The umbrella's margin

This is the umbrella company's fee for running your payroll, handling your IR35 compliance as your employer, and covering employer's liability and public liability insurance. Margins are typically a flat weekly or monthly fee rather than a percentage, commonly somewhere between £15 and £30 a week depending on the provider.

At £20 a week across 46 weeks, that is £920 a year.

What is left: your gross salary

Take the contract value, subtract employer NI, the apprenticeship levy, and the umbrella's margin, and what remains is your gross salary. Using the figures above:

£103,500 minus £12,669 minus £447 minus £920 leaves a gross salary of roughly £89,464.

This is the number your income tax and employee NI are actually calculated on. It is also usually the first number that surprises contractors moving from a limited company, because none of these three deductions exist in the same way outside IR35.

Deduction 4: Income tax (PAYE)

Standard PAYE bands apply. You get a tax-free personal allowance of £12,570, then 20% on income up to £50,270, 40% up to £125,140, and 45% above that. On a gross salary of £89,464, income tax comes to roughly £23,218.

Deduction 5: Employee National Insurance

Employee NI is charged at 8% on earnings between £12,570 and £50,270, dropping to 2% above that. On the same £89,464 gross salary, employee NI comes to roughly £3,800.

The full picture, from day rate to take-home

From a £450 day rate, roughly £62,446 makes it into your bank account across the year, around 60.3% of the original contract value. Every umbrella payslip is running some version of this waterfall. If yours does not clearly separate these five lines, ask your umbrella for a full breakdown, and be wary of any provider that will not give you one. You can see exactly how we calculate this, rate by rate.

Why this matters for negotiating rates

If you are moving from outside IR35 to an umbrella arrangement, the day rate you need to stay whole is higher than your old outside-IR35 rate, not the same. Employer NI and the levy did not exist in your limited company structure in the same way, so a like-for-like day rate leaves you materially worse off before tax is even considered. This is worth raising with your agency directly when a role moves inside IR35: the assignment rate should be uplifted to reflect the new employment costs sitting inside it, not just relabelled.

Where salary sacrifice can help

One deduction on this list is negotiable in part: your gross salary, and everything calculated from it, shrinks if you contribute to a pension via salary sacrifice. Because sacrificed pay is removed before income tax and employee NI are calculated, a meaningful pension contribution recovers a real portion of the inside-IR35 gap. We cover the exact mechanics and numbers in our guide to salary sacrifice pension inside IR35.

If you want to see your own day rate run through this exact deduction sequence, alongside the outside-IR35 limited company comparison, our take-home pay calculator models all three scenarios side by side, including the salary sacrifice version.

Is employer NI actually your problem?

Legally, no. The Low Incomes Tax Reform Group is clear that employer NI liability sits with the umbrella company, not with you. In practice, because the assignment rate is calculated to cover it, the effect on your take-home is the same as if you paid it directly. Understanding this distinction matters if you ever need to challenge an umbrella over how a rate was calculated. For the specific legal question of whether deducting these costs from your assignment rate is permitted, see our guide on employer NI and your day rate.

Frequently asked questions

Why does my payslip show employer NI if I do not legally pay it?

Compliant umbrellas show it for transparency, since it directly affects how your assignment rate is converted into gross pay, even though the umbrella remains the legal payer.

Does every umbrella charge the Apprenticeship Levy?

Only employers with an annual pay bill above £3 million are liable for it, but because umbrella companies process payroll for large numbers of contractors collectively, most sit above this threshold and apply it.

Can I avoid these deductions by using a different umbrella?

The employer NI and Apprenticeship Levy calculations are fixed by HMRC rules and will not meaningfully differ between compliant umbrellas. The umbrella's margin is the one figure that varies and is worth comparing.

How do I check if my umbrella is calculating this correctly?

Ask for a full breakdown showing each deduction against your specific assignment rate. If working practices on the ground do not match what your paperwork says, our Autoclenz reality check flags where practice and paper diverge.

IR35 Verdict provides estimates for illustrative purposes only. Nothing here is tax or legal advice. Speak to a qualified contractor accountant before making decisions based on your umbrella payslip.