You’ve just received your first umbrella payslip and nearly choked on your coffee. The agency said £350 per day, but your actual take-home looks more like £186. Where did the other £164 go?
Welcome to umbrella contractor pay, where your assignment rate goes through more deductions than a hedge maze has dead ends. This isn’t your umbrella company being greedy (well, mostly not). It’s the reality of PAYE employment combined with agency work.
Here’s what’s actually happening: your assignment rate includes costs you never see, your gross salary gets taxed like any employee, and what’s left is your actual pay. I’m going to break down every single deduction, show you real calculations at different day rates, and explain how to spot when something’s wrong on your payslip.
By the end, you’ll know exactly where each pound goes, how to calculate your real take-home, and what you can actually do to keep more of it (legally).
Your Assignment Rate: Not What You’re Actually Getting Paid
Your assignment rate is the total amount the agency pays your umbrella company for your work, which includes both your salary and employer costs like employer’s National Insurance and apprenticeship levy that must be deducted before calculating your gross taxable income. You never actually receive this full amount because it covers the umbrella’s costs of employing you.
Think of the assignment rate as the full bill for your services, not your wage. When an agency says they’re paying £350 per day, they’re telling you what they’re paying the umbrella company. That’s not what lands in your bank account.
Here’s the mistake almost every new umbrella contractor makes: they multiply their day rate by the working days in a year and think “brilliant, I’m earning £87,500 annually.” Then reality hits when the first payslip arrives.
The assignment rate includes everything needed to employ you properly. Employer’s National Insurance (13.8% of your gross salary). The apprenticeship levy (0.5% of total payroll). The umbrella company’s margin for actually running the payroll. Holiday pay accrual. Workplace pension contributions.
Your umbrella company shows the assignment rate on your payslip for transparency. They’re proving they received the full amount from the agency before deductions. It’s not a trick, it’s proof.
The money flows like this: assignment rate → employer costs come off → gross salary is what’s left → your personal deductions (tax, NI, pension) come off → net pay hits your account. That’s the funnel every pound travels through.
The Costs of Employing You (That You Never See)
Before you even see a “gross salary” figure, several chunks disappear to cover the cost of being an employee. These aren’t optional extras. They’re legal requirements that every UK employer must pay.
Employer’s National Insurance: The Biggest Silent Deduction
Employer’s NI currently sits at 13.8% of your gross salary. This money goes straight to HMRC, not into your umbrella company’s pocket. It’s the government’s cut for giving you employee status.
Let’s say your gross salary is £1,500 per week. Your umbrella company pays £207 in employer’s NI directly to HMRC before you see a penny. That’s why a £1,750 assignment rate doesn’t translate to £1,750 gross salary.
This is the deduction most contractors don’t understand when they first switch from limited company work. Limited company directors pay this cost too, but it’s buried in their accountant’s calculations. Under an umbrella, it’s right there on your payslip.
Apprenticeship Levy: Small But Mandatory
The apprenticeship levy is 0.5% of the total payroll. At a £1,750 weekly assignment rate, that’s about £8.75 per week. Not huge, but it adds up over a year.
This money funds UK apprenticeship programmes. You won’t benefit directly unless you’re training an apprentice (you’re not). But every employer with a payroll over £3 million annually must pay it.
Your umbrella company collects it from your assignment rate and forwards it to HMRC. Another slice gone before you see gross salary.
Umbrella Company Margin: What You’re Actually Paying For
Most umbrellas charge between £10 and £25 per week as a flat fee, or 2-4% of your assignment rate. This is the actual cost of having someone else handle your payroll, compliance, insurance, and support.
You’re paying for proper PAYE processing, employment rights, workplace insurance, customer support when your payslip looks wrong, and someone else dealing with HMRC. That has value.
Watch out for hidden extras though. Some umbrellas advertise low margins then sneak in processing fees, onboarding charges, or leaving fees. If the total comes to more than £25 per week, start asking questions.
Here’s a real example: £1,750 assignment rate → minus £242 employer’s NI → minus £9 apprenticeship levy → minus £20 umbrella margin → leaves £1,479 gross salary. That’s where your actual taxable income starts.
Gross Salary: Where Your Personal Deductions Begin
Gross salary is what’s left after all the employer costs come off the top. This is your taxable income as far as HMRC is concerned. It’s what your tax code applies to.
The word “gross” means before your personal deductions like income tax, employee National Insurance, and pension contributions. It’s not what you take home, but it’s the number that matters for tax calculations.
Your gross salary determines everything else about your employment benefits. Statutory maternity pay calculations start here. Mortgage applications look at this figure. Pension contribution percentages apply to this amount. Your tax code works off this number.
The confusion happens because people hear “salary” and think “what I get paid.” Not quite. Gross salary is what you’d get if you paid zero tax and zero NI (which you don’t, because that’s not how the UK works).
Income Tax: The Chunk HMRC Takes
Now we’re into your personal deductions, the ones that come off your gross salary before you see any money. Income tax is usually the biggest single deduction on your payslip.
How PAYE Works for Umbrella Contractors
Pay As You Earn (PAYE) means your tax is calculated and deducted every time you get paid. You don’t need to file a self-assessment tax return. The umbrella company calculates your tax based on your tax code, deducts it, and sends it straight to HMRC.
This is actually one of the best things about umbrella companies compared to limited company work. Your tax is handled automatically. No quarterly payments, no January shock, no sleepless nights wondering if you’ve calculated corporation tax correctly.
Your umbrella reports your earnings to HMRC in real time through the Real Time Information system. HMRC knows what you’re earning, what tax you’re paying, and updates your tax code automatically if needed.
Tax Bands and Rates for 2024/25
Your personal allowance is £12,570. That’s the amount you can earn tax-free each year. If you earn less than this, you pay no income tax at all (though you still pay National Insurance).
The basic rate is 20% on earnings between £12,571 and £50,270. Most contractors sit in this band for at least part of their income. If you’re earning £35,000 gross annually, you’re paying 20% on £22,430 of it.
The higher rate kicks in at 40% on earnings between £50,271 and £125,140. If you’re on £500 per day, you’re hitting this band regularly. That’s when take-home calculations start looking painful.
The additional rate is 45% on everything over £125,140. Very few contractors reach this unless they’re on seriously high day rates or banking specialists. If you’re here, you probably have an accountant already.
Scotland has different tax bands and rates. If you live in Scotland, your tax calculations will differ slightly, usually meaning you pay a bit more tax at middle income levels.
Your Tax Code: The Instructions for Your Tax
The most common tax code is 1257L. This gives you the full £12,570 personal allowance spread across your pay periods. If you’re paid weekly, you get £241.73 tax-free each week. If you’re paid monthly, it’s £1,047.50 tax-free each month.
Your tax code appears on your payslip. It tells your umbrella company how much of your pay is tax-free each period. Get this wrong and you’ll either pay too much tax or too little (leading to a nasty bill later).
K codes mean you’re paying back tax you owe from a previous year. The number shows how much extra “income” is added to your pay for tax purposes. A K500 code means £5,000 is added to your taxable income.
BR codes mean you’re paying basic rate tax (20%) on everything with no personal allowance. This usually happens when you have multiple jobs or HMRC doesn’t have your full information.
If your tax code looks wrong, don’t wait for it to fix itself. Check your personal tax account on the HMRC website, or call them on 0300 200 3300. Wrong tax codes cost you real money every week they’re not corrected.
Emergency Tax: The Temporary Nightmare
Emergency tax happens when HMRC doesn’t know your correct tax code, usually because you haven’t provided a P45 from your last job or filled in a new starter checklist. You’ll be put on code 1257L W1 or M1.
The W1 or M1 suffix means “week 1” or “month 1” basis. Your tax is calculated as if every pay period is your first. You don’t get cumulative tax relief, so you pay more tax than you should.
If you normally earn £400 per week but get paid £2,000 one week (catching up on late timesheets), emergency tax treats the £2,000 as your regular weekly pay. The tax calculation assumes you’re earning £104,000 annually. Your tax bill that week will be eye-watering.
Fix it by giving your umbrella your P45 from your previous employer, or completing a new starter checklist if you don’t have a P45. Your umbrella sends this to HMRC, and your tax code gets corrected.
Getting refunds back means waiting for HMRC to process the correction. If you’ve paid too much tax and you’re still working, it usually balances out over the next few payslips. If you’ve left the umbrella, you might need to claim a refund directly from HMRC.
National Insurance: Your Second Biggest Deduction
Employee National Insurance is your contribution to the state benefits system. It’s separate from income tax, charged at different rates, and you can’t avoid it (legally).
Employee National Insurance Rates
You pay 12% on earnings between £12,570 and £50,270 for the 2024/25 tax year. This is the same threshold as the personal allowance for income tax, which makes the maths slightly easier.
The rate drops to 2% on everything you earn above £50,270. This surprises people who think higher earners pay more NI. They do in absolute terms, but the rate actually falls once you’re in higher-rate tax territory.
These are Class 1 NI contributions, the version employees pay. Self-employed people pay Class 2 and Class 4 at different rates. Limited company directors pay Class 1 on their salary and Class 2 if they’re taking less than the threshold.
Here’s a real example: if your gross salary is £1,500 per week, you’re paying around £177 in employee NI. That’s 12% of the amount above £241.73 (your weekly NI threshold).
What National Insurance Actually Pays For
Your NI contributions build your entitlement to the state pension. You need 35 qualifying years to get the full state pension, currently £203.85 per week from age 66.
NI also funds your access to the NHS (though technically the NHS is funded from general taxation, not just NI). You don’t pay separately for NHS services because your NI contributions cover it.
Statutory benefits come from NI too. Statutory sick pay, statutory maternity pay, statutory paternity pay, and employment support allowance all require a minimum NI contribution history. This is where umbrella contractors win over limited company directors who pay themselves tiny salaries.
NI is separate from income tax because it’s meant to be a social insurance system. You pay in, you get specific benefits out. Income tax goes into the general pot for everything else government does.
Employee vs Employer NI: Why Both Appear on Your Payslip
You pay employee NI at 12% and 2%. Your employer (the umbrella company) pays employer NI at 13.8%. Both are calculated on your gross salary, but the employer’s portion comes off before you even see gross salary.
This is why your assignment rate looks so different from your gross salary. The employer’s NI has already been deducted at the top. Then your employee NI gets deducted from your gross.
The total NI burden on your work is roughly 25-26% when you add both portions together. That’s the reality of PAYE employment in the UK. Limited company directors pay the same thing, it’s just structured differently.
Other Deductions That Reduce Your Take-Home
Beyond tax and NI, several other deductions might appear on your payslip. Some are optional, some are mandatory once they’re triggered, and some you should never opt out of.
Pension Contributions: Money You Won’t See for Decades
Auto-enrolment pensions require a minimum 5% contribution from you and 3% from your employer, calculated on qualifying earnings (basically your salary between £6,240 and £50,270 annually). That’s 8% total going into your pension pot.
This comes straight off your gross salary, reducing your take-home each week. At £1,500 gross weekly, you’re contributing around £75 per week. That’s £3,900 per year you won’t see in your current account.
But here’s the thing: pension contributions get tax relief. You only actually pay 4% of your gross salary because the 1% difference is made up by the tax you don’t pay. It’s one of the few legal tax savings available to PAYE employees.
Opting out means refusing free money from your employer (the 3% employer contribution). Unless you’re in genuine financial crisis, don’t opt out. You’re stealing from your future self.
The impact on weekly take-home is real though. That £75 per week is £325 per month you could be spending now. It’s the price of not being destitute at 70.
Student Loan Repayments: The Graduate Tax
Plan 1 loans (pre-2012 England/Wales, Scottish students) get deducted at 9% of earnings above £24,990 annually (£480.58 weekly). If you’re earning £600 gross per week, you’re repaying £10.75 per week.
Plan 2 loans (post-2012 England/Wales) kick in at 9% above £27,295 annually (£524.90 weekly). Slightly higher threshold, same 9% rate above it.
Plan 4 loans (Scottish students from 2007-2021) start at 9% above £31,395 annually (£603.75 weekly). Scotland’s thresholds are generally higher.
Postgraduate loans are 6% on everything above £21,000 annually (£403.85 weekly). These stack on top of undergraduate loan repayments if you have both.
The deductions start automatically once HMRC tells your umbrella company you have a student loan. It appears on your payslip with no warning. Check you’re on the right plan because wrong plan types mean you’re repaying too much too soon.
Read more about student loan deductions.
Court Orders and Other Mandatory Deductions
Attachment of earnings orders happen when a court has ordered your employer to deduct money for unpaid debts. This could be council tax arrears, unpaid fines, or child maintenance.
The order tells your umbrella company exactly how much to deduct each pay period and where to send it. You can’t negotiate with your umbrella about this, they’re legally required to comply.
Child maintenance deductions work through the Child Maintenance Service if you’ve been assessed and haven’t been paying voluntarily. The amount depends on your earnings and how many children you’re supporting.
These deductions are rare for contractors but they’re possible. If one appears on your payslip unexpectedly, you’ve either ignored court letters or there’s been an administrative error. Chase it immediately.
Reading Your Umbrella Payslip: Line by Line
Your payslip tells the complete story of where your money goes, but only if you know how to read it. Most contractors glance at the net pay figure and ignore the rest. That’s a mistake.
Top Section: Assignment Rate and Employer Costs
The first figure should be your assignment rate. This is what the agency paid the umbrella for your work. It might say “contract income” or “assignment rate” depending on your umbrella.
Next you’ll see employer’s National Insurance deducted, usually around 13.8% of your gross salary (which hasn’t been calculated yet, but your payslip works backwards from it). This goes to HMRC.
The apprenticeship levy appears next, typically 0.5% of the assignment rate. Small amount, but it’s there every week.
Your umbrella company’s margin or admin fee is deducted here too. This should match what they told you when you signed up. If it’s higher, ask why.
What’s left after these deductions is your gross salary. This is where your personal deductions start.
Middle Section: Your Gross and Deductions
Gross salary sits at the top of this section. Everything below it is coming out of your pocket, not the umbrella’s.
Income tax appears next, calculated using your tax code. If you’re on 1257L, you’ll see your personal allowance applied, then 20% tax on everything above £12,570 annually (pro-rated to your pay period).
Employee National Insurance follows, typically 12% on earnings above £242 per week or £1,048 per month. If you’re earning above £50,270 annually, the rate drops to 2% on the excess.
Pension contributions show your 5% auto-enrolment deduction (or 4% after tax relief, depending on how your umbrella displays it). This should be going into a proper workplace pension scheme.
Student loan deductions appear here if HMRC has notified your umbrella you have one. The plan type and amount should be clear.
Bottom Section: Net Pay and What You’re Actually Getting
Net pay is what hits your bank account. This is your assignment rate minus all employer costs, minus all your personal deductions.
You should also see holiday pay accrual somewhere on your payslip. This is 12.07% of your hours worked, building up to give you paid time off. If it’s not showing, your umbrella might be including it in your hourly rate (less transparent but legal).
Year-to-date figures appear at the bottom, showing cumulative totals for the tax year. Check these periodically to make sure your tax and NI are tracking correctly across the year.
Common Payslip Confusions
The biggest confusion is people thinking the assignment rate is what they’re getting paid. It’s not. It’s the starting point before all deductions.
Second biggest confusion is not recognising the difference between employer’s NI and employee NI. Both appear on the payslip, both are called National Insurance, but one comes off before gross and one comes off after.
Third is seeing emergency tax and not realising it’s temporary. That huge tax deduction will get refunded once your tax code is corrected.
Check these things every payslip: is your tax code correct? Is your holiday pay accruing? Are there any deductions you don’t recognise? Does the maths from assignment rate to net pay actually add up?
Red flags to watch for: hidden admin fees that weren’t disclosed in your contract, the same wrong tax code persisting for months, no holiday accrual showing anywhere, or unexplained deductions with vague labels like “processing fee.”
Real Take-Home Examples at Different Day Rates
Numbers make this real. Here’s what contractors at three common day rates actually take home after all deductions.
£250 Per Day Contractor
Weekly assignment rate for five days: £1,250.
Employer’s NI at 13.8%: around £152. Apprenticeship levy at 0.5%: around £6. Umbrella margin: £20. That leaves gross salary of £1,072 per week.
Income tax at 20%: roughly £166 (after personal allowance). Employee NI at 12%: around £100. Pension at 5%: roughly £54. Net weekly pay: £752.
That’s £150 per day take-home from a £250 day rate. Annual take-home if you work 46 weeks: £34,592.
£350 Per Day Contractor
Weekly assignment rate for five days: £1,750.
Employer’s NI: around £242. Apprenticeship levy: around £9. Umbrella margin: £20. Gross salary: £1,479.
Income tax: roughly £247. Employee NI: around £148. Pension: around £74. Net weekly pay: £1,010.
That’s £202 per day take-home from a £350 day rate. Annual take-home for 46 weeks: £46,460.
£500 Per Day Contractor
Weekly assignment rate for five days: £2,500.
Employer’s NI: around £396. Apprenticeship levy: around £13. Umbrella margin: £25. Gross salary: £2,066.
Income tax: roughly £429 (you’re hitting higher rate tax here). Employee NI: around £189. Pension: around £103. Net weekly pay: £1,345.
That’s £269 per day take-home from a £500 day rate. Annual take-home for 46 weeks: £61,870.
Factors That Change Your Take-Home
Your tax code makes the biggest difference. If you’ve lost personal allowance due to high earnings (over £100,000), your take-home drops significantly. A K code adds extra taxable income, reducing net pay further.
Student loan repayments can take another 9-15% above certain thresholds. If you’re on Plan 2 with a postgraduate loan, that’s 15% of earnings above £27,295 just for student loans.
Opting out of the pension adds about 4% to your take-home (the tax-relief adjusted amount you actually pay). That’s roughly £40-£50 per week for most contractors.
Number of weeks worked changes annual take-home massively. Work 46 weeks instead of 52 and you’ve lost six weeks of income. Take a three-month gap between contracts and your annual figure drops by 25%.
Scottish taxpayers pay slightly more income tax at middle earnings levels due to different tax bands. The starter rate and intermediate rate mean more of your income is taxed, though thresholds differ slightly.
Getting Paid Twice in One Tax Period
Sometimes your payslip shows huge tax deductions because you’ve been paid twice in one week or month. This happens more often than you’d think.
A tax period is either a week or a month, depending on how frequently your umbrella pays you. Most umbrellas pay weekly, so each week is a separate tax period for HMRC’s calculations.
This double payment happens when timesheets are late and you’re catching up, you finish one assignment and start another in the same week, holiday pay is released at the same time as regular pay, or you receive a bonus or back-pay adjustment.
Your tax looks higher that period because PAYE calculates cumulatively. If you’re paid £2,000 in one week but usually earn £800, the system thinks you’re suddenly earning £104,000 annually. The tax calculation adjusts accordingly.
Unless you’re on a Week 1 or Month 1 tax code (W1/M1), this balances out over the rest of the tax year. The following weeks show lower tax as the cumulative system corrects itself. By the end of the tax year, you’ve paid exactly the right amount.
If you are on W1/M1, the system doesn’t balance out automatically. Each pay period is treated in isolation. You’ll need to claim a refund from HMRC at the end of the tax year or when you leave that job.
What You CAN’T Claim as Expenses
Here’s where umbrella companies differ massively from limited companies. You can’t claim business expenses in most cases. Don’t let anyone tell you otherwise.
Travel to and from your client site is ordinary commuting. HMRC sees this the same as any employee driving to their permanent workplace. It’s not claimable, even if the journey is 100 miles. You’re travelling to your place of work.
Meals and subsistence aren’t claimable either. You need to eat whether you’re working or not. HMRC doesn’t accept “but I bought lunch near the client site” as a business expense for employees.
Accommodation near your client site falls into the same trap. If you’re working at the same site for more than 24 months, it’s a permanent workplace. The accommodation is just where you’re choosing to live while working there.
Professional subscriptions have limited exceptions. Some professional body memberships are claimable if they’re required for your role, but that’s rare. Your gym membership definitely isn’t.
Training and development costs come out of your pocket. Want to do a course to boost your skills? You’re paying for it yourself. Limited company directors can claim this through their company. You can’t.
The reason is simple: umbrella contractors are employees for tax purposes. Employees can’t claim expenses the way limited company directors can. That’s the trade-off for PAYE simplicity.
The tax schemes that promise you can claim everything are disguised loan schemes or worse. They’re illegal, HMRC will catch up eventually, and you’ll owe thousands in back taxes, interest, and penalties.
What IS sometimes claimable: parking costs at the client site (not commuting, but once you’re there), professional fees that are mandatory for your job (rare), and tools or equipment you personally pay for that belong to you (also rare). That’s it.
Comparing Take-Home: Umbrella vs Limited vs Sole Trader
You want to know if you’re getting shafted on tax compared to other options. Here’s the honest comparison.
Umbrella Company Net Pay
At £350 per day (£1,750 weekly), you’re taking home roughly £1,010 per week. That’s £202 per day after all deductions.
The pros: zero admin, complete employment rights including holiday pay and sick pay, no IR35 risk, no accountant fees, no Companies House filing, automatic PAYE means no self-assessment.
The cons: highest tax burden of all the options, no expense claims, no control over when you’re paid, umbrella margin reduces take-home slightly.
Limited Company Net Pay (Outside IR35)
Same £350 day rate paid to your limited company as £1,750 per week. Take a small salary (£12,570 annually) and the rest as dividends.
Net take-home: roughly £1,100 per week (£220 per day). That’s about £90 per week more than umbrella, but you’re paying around £1,500 per year for an accountant.
The pros: more tax efficient due to dividend tax rates, some legitimate expense claims reduce tax bill, you control company structure and timing of payments.
The cons: accountant fees, Companies House compliance, self-assessment tax return, IR35 risk if you get it wrong, no employment rights, gaps in national insurance record affecting state pension.
Limited Company Net Pay (Inside IR35)
If your contract is inside IR35, you must operate PAYE through your limited company. Same £350 day rate, same £1,750 weekly.
Net take-home: roughly £970 per week (£194 per day). That’s less than umbrella because you’re still paying accountant fees and Companies House costs but getting umbrella-level tax.
The pros: none really, except you keep your limited company structure.
The cons: worst of both worlds, all the admin of a limited company with none of the tax benefits, still no employment rights, accountant fees for nothing.
Sole Trader Net Pay
As a sole trader, the £350 day rate goes straight to you as self-employment income. You pay income tax and Class 2/Class 4 NI through self-assessment.
Net take-home: roughly £1,050 per week (£210 per day) after tax and NI. That’s between umbrella and limited company efficiency.
The pros: some expense claims allowed, no company admin, relatively simple accounting, lower accountant fees than limited company.
The cons: self-assessment tax return required, IR35 risk still applies if working like an employee, no employment rights, must register with HMRC as self-employed, more complex than umbrella.
Sole traders need to register for self-assessment and get a UTR number from HMRC to file their annual tax return. This 10-digit reference number is how HMRC tracks your self-assessment obligations. You’ll need it before submitting your first return.
Here’s the reality: umbrellas take more tax than the alternatives, but they give you complete simplicity and full employment rights. If you value not thinking about tax and knowing you’re compliant, the extra tax is the price. If you want to maximise take-home and don’t mind admin, limited company outside IR35 wins. If your contracts are inside IR35, umbrella beats limited easily.
How to Maximise Your Take-Home (Legally)
You can’t dodge tax, but you can make sure you’re not paying more than necessary. Here’s what actually works.
Check your tax code is correct. This is the single biggest thing you can control. Log into your personal tax account on GOV.UK, verify your tax code matches what’s on your payslip, and if it’s wrong, call HMRC immediately on 0300 200 3300. Wrong tax codes cost contractors thousands per year.
Don’t opt out of your workplace pension. You’re refusing free money from your employer and tax relief from HMRC. That 5% contribution only costs you 4% after tax relief, and you get a 3% employer contribution on top. That’s 8% going into your pension pot for a 4% real cost.
Understand which student loan plan you’re on. If you’re on the wrong plan, you’re repaying too much too soon. Check your student loan account and make sure HMRC has the right information.
Keep good records for HMRC queries. Save all your payslips, your P60 at year-end, and your P45 when you leave. If HMRC queries your tax later, you’ll need proof of what you paid.
Use salary sacrifice schemes if your umbrella offers them. Some umbrellas let you sacrifice salary for additional pension contributions or childcare vouchers. This reduces your taxable income, saving tax and NI.
Work more weeks per year. Sounds obvious, but taking fewer gaps between contracts means more annual income. Every week not working is a week of zero pay.
Consider switching umbrellas if the margin is excessive. If you’re paying £40 per week when the market rate is £20, that’s £1,040 per year you’re losing. Shop around.
What won’t work: tax avoidance schemes promising massive savings, offshore arrangements that “aren’t technically illegal,” loan schemes where you’re paid in loans not salary, or anything involving moving money through multiple countries to avoid UK tax. These are all illegal, HMRC catches them eventually, and you’ll owe everything back plus interest and penalties.
Common Pay Issues and How to Fix Them
Payslips go wrong more often than they should. Here’s how to fix the most common problems.
Wrong Tax Code
You’ll spot this because your tax deduction looks unusually high or unusually low compared to your gross salary. Check your tax code on your payslip against what it should be for your circumstances.
Get your P45 from your previous employer if you haven’t provided it yet. This tells HMRC and your umbrella your correct tax position. Without it, you’re often stuck on emergency tax.
Complete HMRC’s starter checklist if you don’t have a P45. Your umbrella should give you this form. It tells HMRC your employment situation so they can issue the right tax code.
Contact HMRC directly to update your tax code. Call 0300 200 3300, explain the situation, and they’ll issue a revised code to your umbrella. Don’t wait for your umbrella to fix it, they can’t without HMRC’s instruction.
The umbrella will adjust your tax once HMRC confirms the new code. If you’ve overpaid, it usually corrects over the next few payslips as the cumulative system catches up.
Missing Pension Contributions
Check you haven’t opted out. Some contractors opt out temporarily and forget they did it. Log into your pension provider’s website and verify your status.
Look at your payslip for a pension deduction line. It should show your 5% contribution clearly. If it’s not there and you haven’t opted out, something’s wrong.
Chase your umbrella immediately in writing. Email your payroll contact, quote the missing pension deductions, and ask them to confirm why they’re not being made and when they’ll start.
You’re losing employer contributions every week this continues. That 3% employer contribution is free money going missing. The longer it’s wrong, the more you lose permanently.
Incorrect Holiday Pay Accrual
Holiday pay should be 12.07% of your hours worked (equivalent to 5.6 weeks holiday for a full year). Check your payslip shows this accruing.
Some umbrellas include holiday pay in your hourly rate instead of accruing it separately. This is legal but less transparent. Ask your umbrella which method they use.
Request correction in writing if holiday pay is missing. Email payroll, state exactly which weeks are affected, and ask for the missing accrual to be added to your account.
If your umbrella ignores you, escalate to ACAS (Advisory, Conciliation and Arbitration Service). Holiday pay is a legal entitlement. ACAS can mediate and, if necessary, you can take it to employment tribunal.
Unexplained Deductions
Ask your umbrella to explain any deduction you don’t recognise, in writing. Don’t accept verbal explanations, get it in an email you can reference later.
Check your contract for agreed fees. Everything the umbrella deducts should be listed in your contract or terms and conditions. If it’s not there, challenge it.
Challenge anything not in your contract immediately. If they’ve added a new “processing fee” or “administration charge” that wasn’t agreed, that’s not acceptable. Demand it’s refunded and removed.
If your umbrella company is FCSA accredited (Freelancer and Contractor Services Association), report them to FCSA if they’re deducting unexplained fees. FCSA members must meet compliance standards, and they take complaints seriously.
Know Every Penny
Your umbrella payslip tells you exactly where every pound goes, from assignment rate to net pay. Every deduction is there for a reason, even if it’s painful to see 40% disappear before the money hits your account.
Check every payslip when it arrives. Verify your tax code, confirm your pension is being paid, make sure holiday pay is accruing, and challenge any deduction that doesn’t make sense. Most contractors don’t do this, then wonder why they’ve lost thousands to wrong tax codes.
Umbrella companies take more tax than limited companies, that’s the reality. But they also give you complete simplicity, full employment rights, and zero compliance risk. That’s the trade-off. If you value your time and want to focus on contracting rather than accounting, the extra tax is the price of that simplicity.
Calculate your expected take-home based on your day rate using the examples in this article. Compare it against your actual payslips. If there’s a significant difference, investigate immediately. Don’t assume the umbrella has it right.
Report issues the moment you spot them. Wrong tax codes compound over weeks. Missing pension contributions are lost permanently. Holiday pay errors add up over months. The longer you leave problems, the harder they are to fix and the more money you lose.
