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Going Under An Umbrella? Costs and Considerations When Going Inside IR35

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As you are probably aware, several changes to IR35 legislation came into effect in April this year (2021) that impacted the private and public sectors. These changes for many contractors placed the responsibility of deciding if contracts were inside IR35 on the shoulders of the end client, rather than the contractor themselves. Consequently, contracts that may have previously been outside IR35 have now moved inside.

The easiest way for some contractors to comply with these new IR35 updates was to start working under what is called an umbrella company. However, this change proved somewhat confusing for several contractors, especially when it comes to the costs and taxation adjustments in working with an umbrella company instead of as a limited company or sole trader.

To clear up this confusion, we have created this blog to outline what an umbrella company is and how they operate in terms of structure and costs.


What Is An Umbrella Company?

An umbrella company is an organisation that acts as an intermediary between the contractor and recruitment agency (such as Zebra People) and/or the end client. It employs contractors working on fixed-term contracts and takes the responsibility of paying tax away from the contractor.

When you work within IR35 with an umbrella company, the accountancy, administration, and taxation are handled by the umbrella company and not the contractor. Due to this, contractors that work with umbrella companies do not have the typical financial responsibilities of running a limited company.  The umbrella company manages payroll by collecting payment for the work completed from the recruitment agency or end client and pays the contractor through PAYE.

This means all taxes, National Insurance contributions and pension payments, and any other costs are deducted at source before reaching the contractor.

As such, the payment that the contractor receives each month when working with an umbrella company is the net pay and not the gross.


Breakdown Of Costs Working With An Umbrella Company

The advantages of working with an umbrella company are clear in that you do not have to worry about calculating your taxes, NI or pension contributions or any other financial costs, as the umbrella company will handle them for you. In addition, you can be sure that you are working lawfully by adhering to the IR35 legislation.

However, it is important to understand the various costs associated with working through one of these organisations. These are explained below:

  • Umbrella companies will charge a fee in the form of a fixed rate or a percentage of earnings to use the service- this is how they make their money. Most contractors prefer those umbrellas that charge fixed rate fees, as they can work out cheaper.
  • As an employer, an umbrella company must pay an extra portion of National Insurance – called Employer’s National Insurance.
  • Larger companies must also pay the government’s Apprenticeship Levy (an extra tax to fund apprenticeships).
  • Your gross pay will then be subject to employee’s PAYE (which will vary according to your HMRC tax code) and national insurance before arriving at your Net or Take-Home Pay.

Note: It is a legal requirement to pay both Employer’s NI (13.8% of the Umbrella or “Uplifted Contract Rate”) and the Apprenticeship Levy (0.05%).


How You Are Paid Under An Umbrella Company

You “as the contractor” work for the umbrella company; when the final client pays the recruitment company, they do so at an uplifted rate in comparison to how they would usually when operating directly with the contractor.

The recruitment company then pays the umbrella, which in turn pays the contractor. This uplifted or ‘umbrella’ rate is paid to cover the fees and expenses of the umbrella company.

When the umbrella company receives payment from the client, they deduct their costs which include:

  • Their fee
  • The employer’s NI contribution (13.8%)
  • The Apprenticeship Levy (0.05%)
  • The employer’s pension contributions (optional)

Next, the umbrella company deducts your costs; these include:

  • Employee NI Contributions
  • PAYE Tax (at your tax code rate)
  • Holiday Pay (12.07%)
  • Pension provision (optional)

What is left over is your NET or Take Home Pay


Wrapping Up

It is essential to do your due diligence and calculate the various costs levelled on your gross pay per month to get a good picture of whether working under an umbrella company is a good option for you.

You will find that many umbrella companies will offer you a calculator that considers each cost to see how much you will take home – take advantage of these. However, do make sure that you check precisely what assumptions they have used to arrive at the figure.

Here at Zebra People, we only work with FCSA regulated umbrella companies; these companies operate using the HMRC PAYE scheme and are regularly assessed and audited to ensure that they continue to operate at the highest possible standards.

It is important to understand the pros and cons of working under an umbrella company and appreciate that not all of these companies are equal. As such, it is worth investigating which one will provide the best service for you at a reasonable rate.

We hope that this article has made working for an umbrella company clearer.


If you are looking for new candidates for your team or looking to be placed into a fantastic new role, contact Zebra People at or ring our London-based office on 020 7729 4771.

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