Why your umbrella payslip looks smaller than the assignment rate

The confusion in one sentence

If your contract says £400/day and you'll work 220 days, you'd expect ~£88,000 of gross income. As a permanent employee that would translate to about £62,000 net (PAYE + NI). But your umbrella payslip's gross salary line says ~£75,000, and your net is ~£55,000. What happened to the missing £13,000?

Three deductions came out of the assignment rate before the PAYE chain started. None of them are theft, they're either HMRC's cut (passed through transparently) or the umbrella's small margin. The confusion is entirely about WHERE in the chain each deduction sits, and once you see it laid out, it stops being mysterious.

The £400/day worked example

Concrete numbers, 2026/27 rates, England, no student loan, no salary-sacrifice pension, £25/week umbrella margin.

Step 1: Annual assignment rate

This is the assignment rate, what the agency pays the umbrella. It is not your gross salary. (This is the sentence to internalise.)

Step 2: Deduction one, umbrella margin

The umbrella's actual fee for handling payroll, PAYE, employer NI compliance, statutory benefits, holiday pay, and pension auto-enrolment. £15-£30/week is the FCSA-accredited range; the £25/week we use here is mid- range. Goes to the umbrella, not HMRC.

Step 3: Deduction two, employer NI on the salary

This is HMRC's cut, not the umbrella's. Employer NI in 2026/27 is 15% of pay above the £5,000 secondary threshold. A normal employer pays this out of their own pocket on top of your salary. An umbrella's revenue (the assignment rate) is fixed, so the only place this money can come from is the assignment itself.

People sometimes describe this as the umbrella “passing on” employer NI to the contractor. That's technically wrong, legally, the umbrella IS paying it as the employer. But economically the cost comes out of money that would otherwise have been your gross salary, which is why it feels passed-on.

Step 4: Deduction three, Apprenticeship Levy

Charged to UK employers with annual pay bills above £3 million. Almost every umbrella has thousands of contractors on its books, so the £15,000-per-employer levy allowance is consumed in the first hours of the tax year. From then on the levy applies as a 0.5% pass-through cost on every contractor's gross salary.

Small in absolute terms (£375/year at £75k gross, about £7/week) but real. Some umbrellas hide it inside a “company costs” line; transparent ones show it explicitly.

Step 5: What's left becomes your gross taxable salary

This is the figure your payslip starts from. Now the normal PAYE chain runs.

Step 6: Income tax + employee NI

Step 7: Net to pocket

£54,500/year on a £88,000 assignment — about 62% retention. Or, written more usefully: about £4,544/month or £1,049/week of personal cash flow.

Where the £33,500 went

• £17,762: income tax to HMRC
• £10,500: employer NI to HMRC
• £3,527: employee NI to HMRC
• £1,300: umbrella margin (their fee)
• £375: Apprenticeship Levy to HMRC

Of the £33,500 of deductions, £32,164 (96%) goes to HMRC. The umbrella keeps £1,300 (4%) for running the payroll, handling employment compliance, and being your employer-of-record. The umbrella isn't taking a giant cut, HMRC is.

What this means for sanity-checking your payslip

Three numbers worth recognising on any umbrella payslip:

1. The assignment rate: what the agency paid the umbrella (sometimes called “invoice value” or “contract income”).
2. The gross taxable salary: what HMRC taxes you on. This is the “gross” in your normal salaried-employee sense.
3. The net pay: what arrives in your bank account.

The gap between (1) and (2) is the part most people don't see at first. If your payslip shows umbrella margin, employer NI, and Apprenticeship Levy as separate line items between (1) and (2), you're looking at a transparent payslip from a legitimate umbrella. If those three deductions are hidden inside a single “company costs” line, ask your umbrella for the breakdown, they should provide it on request.

The most powerful thing you can do about it

Salary sacrifice into pension. The single biggest tax move available to umbrella contractors.

Sacrificing £500/month (£6,000/year) of gross taxable salary into pension via the umbrella means:

• You don't pay income tax on the £6,000 (saves £1,200 at the 20% basic rate, £2,400 at the 40% higher rate).
• You don't pay employee NI on it (saves £480 for a basic-rate earner; less for higher).
• The umbrella doesn't pay employer NI on it either (saves £900). And because the umbrella's pay-bill cost is fixed at the assignment rate, this saving flows back to you as more total compensation, either more cash or more pension.

Effective marginal saving for a higher-rate umbrella contractor: about 50–60p of every £1 sacrificed. That's the kind of tax move you don't see in normal employment because you don't typically capture the employer NI saving, but the umbrella structure passes it back. If you're inside-IR35 and not doing salary sacrifice, you're leaving money on the table.

Sources

• gov.uk/national-insurance , Class 1 employee + employer NI rates
• gov.uk/income-tax-rates , current bands and thresholds
• gov.uk: rates and thresholds for employers 2026/27 , Apprenticeship Levy and threshold tables