Umbrella Take Home Pay: Why 90% is Impossible

Umbrella Take Home Pay: Why 90% is Impossible

07/29/2022 - 15:09

When it comes to choosing an umbrella company, maximising take home pay is a priority for most contractors.

Unfortunately, schemes that advertise the best rates of take home pay are also the ones that will get you in trouble with HMRC.

Even though most of these firms claim to be ‘100% compliant’, the reality is that an umbrella company that can offer 90% take home pay simply can’t be conforming with tax regulations.

Miles Grady, Director of, said: “Any umbrella company that offers 90% or even 80% take home pay shouldn’t be trusted. Using one of these firms will only land you with a big fine and thousands of pounds in unpaid taxes.

“An absence of effective regulation of the umbrella market means we’re still seeing contractors get misled.”

How umbrella take home pay is calculated

When you work through an umbrella company, the umbrella becomes your employer. They charge your end client for your work, deduct employment costs and personal tax and National Insurance, and retains a mrgin.  The rest of the money is passed on to the employee.

Employee deductions

The first and most obvious employee deduction is pay as you earn income tax. Once you pass the personal allowance of £12,570, you will pay 20% income tax on your taxable earnings.

Once you earn over £50,271 and £150,000, you are also liable to pay higher and additional rate levels of income tax.

Other employee deductions include employee’s national insurance, workplace pension contributions and student loan payments.

Employer deductions

Because umbrella companies generally retain a margin, and don’t profit from the labour of their employees in the same way as other companies, they can’t afford to pay for other employment costs like employer’s national insurance (15.05%) and the apprenticeship levy (0.5%). These employment costs are paid from your assignment pay rate.

Most umbrella companies will also charge the recruitment agency an additional 12.07% for holiday pay, but this will be redistributed to you as part of your regular wages, or when you take time off - so you won’t be short for cash when you take a holiday. Any remaining balance is paid to you when you end your umbrella contract.

It’s really important you take these additional costs into account when you discuss an assignment rate with your end client. If you don’t allow for these extra costs, you could end up in a worse position than a full-time employee.

Spotting a tax avoidance scheme

If an employment scheme claims to offer over 80% take home pay, then you can be fairly sure it is a scam. There are other ways that you can spot a tax avoidance schemes.

Many tax avoidance schemes use complicated financial mechanisms like loans and interest payments to try and circumvent tax laws. These schemes often claim to be ‘HMRC-approved’ or ‘checked by a barrister’, but they will almost always be unlawful. director Miles Grady said: “If a contract has very complicated pay arrangements you should steer well clear - or, at the very least, take advice from someone who won’t stand to profit from your employment. 

“My golden rule for contractors is if it sounds too good to be true, then it probably is.”

For more information about working through a compliant umbrella company, speak to a member of the team today. Call: 01625 544 460.