The headline numbers
A contractor at £500/day for 220 working days has a contract value of £110,000. Working inside IR35 through an umbrella company, the actual take-home is approximately £59,204 a year — about £4,934 a month. The headline contract value is misleading because employer-side costs are deducted before you ever see PAYE pay.
| What happens to the £110,000 | Amount |
|---|---|
| Contract value (day rate × 220 days) | £110,000 |
| Less: Umbrella company margin (~£25/week) | −£1,300 |
| Less: Apprenticeship levy (0.5%) | −£544 |
| Less: Employer National Insurance (15% on most of the balance) | −£14,107 |
| Gross PAYE salary you actually receive | £94,049 |
| Less: Employee income tax | −£25,052 |
| Less: Employee NI | −£3,892 |
| Less: Plan 2 student loan | −£5,902 |
| Take-home | £59,204 |
Effective deduction from contract value: 46.2%. You keep about 54% of every gross pound the client pays.
Why the headline rate is misleading
The £500/day quoted in the contract is the value the client agency pays. Out of that, several things come off before any PAYE tax even applies:
- Umbrella company margin. Typically £15-£30 per week. The umbrella is your employer of record — they handle PAYE, statutory sick pay administration, holiday pay (which is technically rolled into your day rate), and HMRC reporting. The margin is their fee for that admin.
- Apprenticeship levy at 0.5% of payroll. Strictly speaking, only payable on payrolls over £3 million — but most umbrellas pass this on to all contractors regardless because the umbrella's overall payroll exceeds the threshold.
- Employer National Insurance at 15%. This is the big one. The 15% rate (raised from 13.8% in April 2025) is the umbrella's NI on your earnings as their employee. Because there is no actual employer absorbing this, the cost gets passed straight back to you as a deduction before PAYE.
- Holiday pay treatment. Some umbrellas roll holiday pay into the day rate (you get more when you work, nothing when you're off). Others reserve a portion as accrued holiday. The total amount is the same; the timing differs. Read the umbrella's "Key Information Document" carefully.
Then on the gross PAYE figure, you pay normal employee income tax, employee NI, and any student loan / pension deductions.
The four decisions for an inside-IR35 contractor
- Choose the right umbrella. Margins range from £15 to £35 per week. £20 difference per week × 52 weeks = £1,040 a year you'll never see again. Use a margin-calculator and compare 3-4 named umbrellas before signing. Watch for umbrellas that promise unusually high take-home figures — these almost always involve some form of mini-umbrella, MSC, or disguised remuneration scheme that HMRC will eventually unwind, leaving you with a tax bill years later.
- Salary-sacrifice into a pension via the umbrella. Most major umbrellas allow salary sacrifice into a workplace pension. This is the single biggest tax-saving move available inside IR35. £500/month sacrificed saves about 42% in tax+NI for higher-rate contractors plus the employer NI saving usually flows into the pension too. The salary sacrifice calculator shows the maths.
- Track expenses you actually can claim. Inside IR35 strips most expense relief — but you can still claim eligible business mileage above approved rates and certain training expenses. The bar is high; HMRC's manual lists what does and doesn't qualify. Don't rely on the umbrella's "expenses calculator" as a substitute for genuine receipts.
- Reassess every renewal. If the contract status (inside vs outside IR35) is finely balanced, push back at renewal. The Status Determination Statement is the client's call but you can request a review and provide your own argument. The IR35 status checker walks through the indicators.
Inside vs outside IR35 — the real difference
The same £500/day contract outside IR35 (through a limited company) can deliver £15,000-£25,000 more take-home a year, primarily because of two things: salary-vs-dividend optimisation, and the absence of employer NI being deducted before PAYE. The outside-IR35 contractor money guide shows the same £500/day numbers run through a limited company.
That said, inside-IR35 has its merits: zero administrative burden (no Companies House, no Corporation Tax filing, no VAT registration), no MSC risk, full employment rights at the umbrella, and statutory benefits. For contractors who value simplicity, the after-tax difference may be worth the cost.
The most common mistake
Falling for an "umbrella" that promises 80%+ take-home. UK PAYE deductions on £100,000+ income mathematically cap take-home at about 70-72% of gross salary. Anything claiming higher is using one of: a "mini-umbrella" structure that splits payments across many shell companies (illegal), a loan-based remuneration scheme (HMRC will unwind it years later under the Loan Charge), or an offshore arrangement (tax avoidance scheme that triggers DOTAS reporting and personal liability).
If you've used one of these in the past, the HMRC disclosure facility exists to come clean before they find you.
Sources
HMRC CEST tool · GOV.UK working through an umbrella company · Employer NI rates.