IR35 and umbrella companies explained

Inside and outside IR35

IR35 (the off-payroll working rules) applies when you work through an intermediary, usually your own limited company, but the relationship would be employment if you were engaged directly. Key factors are control over how, when and where you work, whether you can send a substitute, mutuality of obligation, financial risk, and being part and parcel of the client's organisation.

In the public sector and for medium and large private sector clients, the client decides your status and issues a Status Determination Statement. For small private clients (from April 2025, meeting two of: turnover up to £15 million, balance sheet up to £7.5 million, 50 or fewer employees) your own company decides. HMRC's CEST tool gives a view, but it is not binding on a tribunal.

How an umbrella company pays you

An umbrella company employs you and invoices the agency for your time. The assignment rate the agency pays is not your gross salary. The umbrella deducts its own employer costs first, then runs PAYE on what is left.

• Umbrella margin: a weekly or monthly fee, commonly around £15 to £30 a week.
• Employer NI: 15% of pay above £5,000 a year.
• Apprenticeship Levy: 0.5% of pay, because umbrellas have pay bills over £3 million.
• Employer pension: auto-enrolment minimum 3% of qualifying earnings (unless you opt out).
• Holiday pay: either accrued, or rolled up at 12.07% of pay for irregular-hours workers, which is allowed for leave years starting on or after 1 April 2024. It is part of your gross pay, not an extra.

Worked example: £500 a day inside IR35

220 days at £500 = £110,000 assignment income to the umbrella. Ignoring pension, with a £25 weekly margin (£1,300 a year):

• Available for employment costs: £108,700
• Gross pay G solves G + 15% x (G - £5,000) + 0.5% x G = £108,700, so G = £94,761.90
• Employer NI £13,464.29; Apprenticeship Levy £473.81
• Income Tax £25,336.76; employee NI £3,905.84
• Take-home: £65,519.30, about 60% of the assignment rate

Joint and several liability from April 2026

From 6 April 2026, where a worker is supplied through an umbrella company, the recruitment agency that contracts with the end client becomes jointly and severally liable for any PAYE and National Insurance the umbrella fails to pay. If there is no agency, the end client is liable. This targets non-compliant umbrellas and disguised remuneration schemes, and agencies are now carrying out much tighter due diligence.

For contractors it means fewer umbrellas offering unrealistically high take-home pay. Any scheme promising 80% to 90% retention through loans, "bonuses" or untaxed payments is almost certainly tax avoidance, and you, not just the umbrella, can be pursued for the tax.

Checking your payslip

• Ask for a Key Information Document before starting; agencies must provide one.
• Your payslip should show the gross pay, Income Tax, employee NI and pension. Employer NI and levy should not appear as deductions from your gross pay.
• Check your tax code (usually 1257L) and that earnings show in your HMRC app.

Day rates and permanent salaries: what is equivalent?

Inside IR35, the PAYE salary an umbrella can pay you is only about 86% of the assignment income, because employer NI, the Apprenticeship Levy and the margin come out first. Take-home falls from about 66% of the assignment income at £300 a day to 54% at £650.

The table assumes 220 working days, a £25 weekly umbrella margin, no pension and England tax rates. The last column shows the permanent salary that would give the same take-home pay. Unlike that salary, the day rate comes with no employer pension, sick pay or paid leave beyond the holiday pay built into the umbrella's figures.

Disputing a status determination

If a medium or large client decides you are inside IR35, you can challenge the decision through the client's status disagreement process. The client must consider your case and respond within 45 days, either confirming the decision with reasons or changing it.

Make the case with facts about how the work is actually done: who controls your hours and methods, whether you have sent or could send a substitute, whether you bear financial risk (fixing defects at your own cost, fixed-price work), and whether you are integrated like staff. A contract clause on substitution that has never been used carries less weight than evidence of real working practice.

Expenses inside and outside IR35

• Inside IR35 through an umbrella: home-to-site travel and subsistence are generally not tax-deductible where you work under supervision, direction or control, or where the off-payroll rules apply.
• Outside IR35 through your own company: business costs such as equipment, software, insurance and qualifying travel are deductible for Corporation Tax.
• Pension contributions: a contractor inside IR35 can still use salary sacrifice through the umbrella, if offered, to cut income tax and NI.
• Beware schemes that promise to pay "expenses" tax-free inside IR35. HMRC treats most of these as non-compliant, and the worker can be pursued for the tax.