What is net pay anyway?

Working as a contractor has many benefits, but it can feel a bit complicated, especially if you’re new to it.

That’s why working with an umbrella company can help make things more straightforward, and completely remove the need for setting up a limited company or working out your own tax payments. 

However, there are costs involved in working with an umbrella company, and your final payment listed on your payslip will come under “net pay”. But what exactly is net pay and how is it calculated?

In this article, we’ll give you a rundown of the different rates you might hear about when working with an umbrella company, and explain what deductions are made so that you know what to expect.

Contracting can offer great rates of pay and interesting assignments, but it might mean that work is sporadic. Constantly changing employers can have a negative impact on your credit score, as well as create a large amount of admin for you.

Working with an umbrella company removes most of that burden. The umbrella company effectively becomes your employer and will put your payments through PAYE on your behalf, just like any other employer. This means that you are free to work on changing contracts for your employment agency, while someone else takes care of your admin and tax calculations.

How do umbrella contractors get paid?

There are several rates that you might have come across when working with your umbrella company. A good way to look at it is by considering it a ladder going from the end hirer to you, each rate in between is a rung in the ladder.

Assignment rate

When you go out to work for a client, the client pays the agency for the work you do. The agency then deducts their placement fee and pays the remainder to the umbrella company. This is called the Assignment Rate.

The umbrella company will then deduct employment costs from the Assignment Rate.

Gross pay

Employment costs usually mean Employer National Insurance Contributions (which are added to the pay by the employment agency and factored into the assignment cost, rather than being deducted from your gross pay), but other deductions might include holiday pay, employer workplace pension contributions and Apprenticeship Levy. 

The umbrella company will then deduct their umbrella margin (this is the umbrella company fees). The umbrella margin is usually chargeable each time your payroll is processed and might be a fixed fee or a percentage. 

The amount remaining is your gross pay.

Net pay

Your gross pay is then subject to your personal Income Tax, employee National Insurance Contributions and personal workplace pension contributions.

The remaining amount is your net pay, which is also called your take home pay. This is the amount of money that will be sent to your bank account.

Don’t get drawn into a tax avoidance scheme

Compliant umbrella companies will make sure that you are paying the right amount of tax. But some non-compliant umbrella companies will advertise seemingly higher payment rates or advertise lower rates of tax. Stay away from any umbrella company that promises “tax savings”, this is tax avoidance, it is illegal and can carry hefty fines and leave you with a large unpaid tax bill.

Ask for a Pay Illustration

The fees charged by umbrella companies can vary quite a lot. This is because they all offer different service levels. While it might be tempting to go for the cheapest umbrella, or the umbrella that seems to offer the best rate, it’s important to find out what goes into that rate, and what you’ll get from working with the umbrella company.

To make it easier to understand, umbrella companies will give you an example “pay illustration” before you agree to work with them. This provides an estimate of your take home pay after tax deductions, so you know what to expect.

It’s important to remember though that this is only an estimate and will work on several assumptions to make the Pay Illustration as universal as possible. There are several things that could throw your actual net pay off, such as an incorrect tax code, your previous earnings and how your holiday pay is tackled. Make sure you ask your umbrella company for clarification if there’s anything you’re not sure of. 

Working with a compliant umbrella company is a great way of accessing lots of benefits that wouldn’t be available to you if you were working through your own limited company, or with multiple employers. But it is important to make sure that you understand what to expect. 

JMK Group UK provides compliant umbrella services to contractors all over the UK. If you have any questions about your net pay, deductions, or anything else, don’t hesitate to get in touch.


Since 2002, JMK have been compliantly consolidating back-office, accountancy and payroll functions. 

We have evolved to provide a range of expert services; such as Funding, becoming a leading provider to the contracting industry.

We know every agency is different in some shape or form, even if only by a little, but important bit. Combining our knowledge and experience of multiple sectors enables JMK to support you all from recruiters and payroll, through to finance, compliance and management.

With JMK as your trusted partner, even the smallest team can process the largest payroll, regardless of payroll type.

Have a look at the wide range of services our Funding can provide to you and your business, it is far more than just payroll and finance.

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