An umbrella company employs a contractor under an overarching contract of employment, operates PAYE and National Insurance on the assignment income, and pays the worker a salary. It is the standard route for inside-IR35 or low-margin assignments where running a PSC is not worthwhile.
The contractor's take-home is the assignment rate less the umbrella's deductions, which legitimately include employer NIC (15%), the Apprenticeship Levy and the umbrella's margin. These are funded from the assignment rate, not from the worker's gross salary, and a compliant umbrella sets this out transparently. Umbrella workers are entitled to holiday pay (which must be paid, not unlawfully retained) and must receive a Key Information Document before starting.
From 6 April 2026 a new joint and several liability regime makes the recruitment agency (or the end client where there is no agency) jointly liable for PAYE that the umbrella fails to remit, while the umbrella remains the legal employer. The firm's stance is to use a compliant umbrella (transparent KID, no inflated "expenses" or skimming schemes) and to avoid any umbrella promising take-home rates that imply tax is not being properly deducted, which is a marker of a disguised-remuneration scheme. For a genuinely inside-IR35 engagement, an umbrella is usually the simpler and often the more economic choice over a PSC.