Umbrella company payroll: how it works
Umbrella companies were used to engage at least 700,000 workers in the UK in 2022 to 2023, and around £500 million was lost to disguised remuneration avoidance over the same period, almost all of it facilitated through umbrella structures [1]. From 6 April 2026 the rules change fundamentally: recruitment agencies, not the umbrella company, become responsible for operating PAYE on those workers [2].
This article explains what umbrella company payroll is, how a worker's pay is worked out from the assignment rate, what deductions appear on a payslip, and how the responsibility for tax moves up the labour supply chain from 6 April 2026.
Key takeaways
- An umbrella company employs workers on behalf of recruitment agencies and end clients, and operates payroll on their earnings [3].
- Pay is worked out from the assignment rate, which covers both the worker's wage and the umbrella company's employment costs [4].
- From 6 April 2026, the agency that supplies the worker becomes responsible for accounting for PAYE and Class 1 National Insurance [2].
- HMRC can recover unpaid PAYE from the agency or end client through joint and several liability [5].
- Workers keep full employment rights, and umbrella companies fall within the remit of the Fair Work Agency once the relevant provisions commence [6].
What umbrella company payroll is
An umbrella company employs a worker on behalf of the recruitment agency or the end client the worker actually carries out assignments for [3]. It sits in the labour supply chain as the legal employer: it holds the overarching contract of employment, runs the payroll, deducts Income Tax and National Insurance, and pays the worker net [3]. The term covers any business supplying labour under a contract of employment while handling the worker's pay [1].
Because the umbrella company is the employer, it carries the same reporting duties as any other employer, including Real Time Information submissions to HMRC. Payroll of this kind runs on HMRC-recognised payroll software that files each pay run through the correct channels. The worker generally has one continuous employment with the umbrella company even where assignments change, which keeps a single tax record running across multiple placements [3].
How pay is worked out through an umbrella company
The single most misunderstood part of umbrella payroll is that the advertised rate is rarely the amount a worker takes home. The recruitment agency pays the umbrella company an assignment rate, and the umbrella company then works backwards through a set of deductions to reach gross taxable pay [4].
The assignment rate and employment costs
The assignment rate, sometimes called the uplifted rate, umbrella rate, day rate or hourly rate, is the sum the agency pays the umbrella company for supplying the worker [7]. It is higher than the rate a worker would expect as gross pay because it has to absorb the umbrella company's employment costs before any wage is calculated [4]. Those costs include employer National Insurance, which rose to 15% on earnings above the Secondary Threshold from 6 April 2026 [8], the employer's minimum pension contribution, and the Apprenticeship Levy where it applies.
The table below sets out the components a reconciliation statement typically separates when moving from the assignment rate to net pay [9].
| Line on the statement | What it represents |
|---|---|
| Assignment rate | Amount the agency pays the umbrella company [[7]](https://www.gov.uk/guidance/key-information-document-guidance-for-agency-workers-paid-through-umbrella-companies) |
| Employer National Insurance | Employer NI at 15% above the Secondary Threshold [[8]](https://www.gov.uk/national-insurance-rates-letters) |
| Employer pension contribution | The employer's auto-enrolment minimum [[4]](https://www.gov.uk/guidance/work-out-pay-from-an-umbrella-company) |
| Umbrella company margin | The fee retained for running payroll [[4]](https://www.gov.uk/guidance/work-out-pay-from-an-umbrella-company) |
| Gross taxable pay | What remains, then taxed through PAYE [[9]](https://www.gov.uk/guidance/check-your-payslip-if-you-work-through-an-umbrella-company) |
Holiday pay and the margin
Holiday pay is a statutory entitlement that must appear somewhere in the calculation, not an optional extra [3]. An umbrella company either pays rolled-up holiday pay, adding an amount to every payslip to cover leave, or holds it back and pays it under a 52-week reference period when the worker takes time off [3]. A worker checking a payslip should be able to see which method applies and confirm the holiday element has not simply disappeared [9].
The margin is the only part of the assignment rate the umbrella company keeps for itself. It is charged each time pay is processed, and it should be shown clearly on the reconciliation statement rather than buried inside a blended deduction [9]. Businesses that would rather run compliant payroll in-house often move to a payroll platform for SMEs instead of routing temporary staff through a third-party employer.
What changes on 6 April 2026
The reform that takes effect on 6 April 2026 is the largest structural change to umbrella payroll since the sector grew to its present size. It moves the responsibility for operating PAYE away from the umbrella company and onto the business that supplies the worker [2].
Where PAYE responsibility moves
From 6 April 2026, the recruitment agency that supplies a worker through an umbrella company becomes responsible for accounting for PAYE and Class 1 National Insurance on the worker's pay [10]. Where there is no agency in the chain, that responsibility falls to the end client instead [10]. The stated purpose is to protect temporary workers from large, unexpected tax bills caused by non-compliant umbrella companies [10].
The change makes the operation of payroll a compliance risk the agency or client now owns directly. Agencies embedding UK payroll into their own systems can run those deductions through an HMRC-recognised payroll API rather than relying on an external employer to remit the tax.
Joint and several liability
Alongside the shift in responsibility, a new Chapter 11 of ITEPA 2003 makes the agency or end client jointly and severally liable for PAYE the umbrella company should have accounted for [5]. HMRC can pursue the agency in the first instance for any payroll tax a non-compliant umbrella company fails to remit [2]. The liability covers the full amount that should have been treated as employment income, including sums disguised as loans or other non-repayable payments [5].
| Chain structure | Who is jointly and severally liable |
|---|---|
| One or more agencies in the chain | The agency holding the contract with the end client, alongside the umbrella company [[2]](https://www.gov.uk/guidance/paye-rules-for-labour-supply-chains-that-include-umbrella-companies-from-6-april-2026) |
| No agency in the chain | The end client, alongside the umbrella company [[2]](https://www.gov.uk/guidance/paye-rules-for-labour-supply-chains-that-include-umbrella-companies-from-6-april-2026) |
Accountants advising staffing businesses on the change often centralise these payrolls on a multi-client payroll dashboard so each engagement can be evidenced if HMRC queries how the tax was operated.
Employment rights and regulation
An umbrella company employee holds the same employment rights as any other employee, and agency workers are additionally protected by the Agency Workers Regulations 2010 [3]. The agency must issue a key information document setting out the umbrella company, the minimum assignment rate, and the deductions the worker can expect before an engagement begins [7].
The regulatory perimeter is widening too. The Employment Rights Act 2025 amends the definition of an employment business in the Employment Agencies Act 1973 to cover the handling of a worker's pay, bringing umbrella companies within the same rules that govern the rest of the temporary labour market [6]. Once that definition commences, umbrella companies fall under the Fair Work Agency, which can act against those failing to meet their legal obligations [6]. Businesses that only ever pay a handful of staff sometimes step outside the umbrella model altogether, using an instant payslip generator for one-off compliant payslips. The wider contractor rules are set out in the overview of IR35 and off-payroll working.
Conclusion
Umbrella company payroll turns on one principle that the advertised rate obscures: the assignment rate has to fund employment costs before it becomes a wage, and every deduction between the two should be visible on a reconciliation statement. A worker who reads that statement, and an agency that checks it, are the two safeguards the system relies on.
From 6 April 2026 those safeguards carry legal weight. The agency or end client now owns the PAYE outcome, and joint and several liability means a non-compliant umbrella company becomes the supplier's problem, not just the worker's. The direction of travel is clear: responsibility for compliant payroll is moving towards the businesses that control the supply chain, and running that payroll accurately, rather than delegating it and hoping, is what the reform rewards.
Frequently asked questions
Who pays the tax when a worker is employed through an umbrella company?
Until 5 April 2026 the umbrella company operates PAYE and pays Income Tax and National Insurance to HMRC as the worker's employer [3]. From 6 April 2026 the recruitment agency that supplies the worker becomes responsible for accounting for PAYE and Class 1 National Insurance, or the end client where there is no agency [2].
Why is the assignment rate higher than the advertised pay rate?
The assignment rate is the amount the agency pays the umbrella company, and it has to cover the umbrella company's employment costs before a wage is calculated [4]. Those costs include employer National Insurance at 15% above the Secondary Threshold, the employer's pension contribution and the umbrella company's margin, so gross pay is always lower than the assignment rate [8].
What is joint and several liability for umbrella company PAYE?
From 6 April 2026 a new Chapter 11 of ITEPA 2003 makes the agency or end client jointly and severally liable with the umbrella company for PAYE that should have been accounted for [5]. HMRC can recover the full amount from the agency in the first instance, including sums disguised as loans, if the umbrella company fails to remit it [2].
Do umbrella company workers have full employment rights?
Yes. An umbrella company employee has the same employment rights as any other employee, and agency workers gain further protection under the Agency Workers Regulations 2010 [3]. The Employment Rights Act 2025 also brings umbrella companies under the Fair Work Agency once the relevant definition commences, adding enforcement against companies that breach their obligations [6].
