Worked example: £1,000 umbrella income, standard tax code (1257L), tax year 2025/26
If you’re contracting via an umbrella company, you become an employee of that company. It’s important to understand how your take-home pay is calculated. Below we break it down step by step, using a simple example based on £1,000 income paid to the umbrella company and the standard 1257L tax code.
Step 1 – Total umbrella income
This is the amount your umbrella company bills the client or agency. In this example, the gross income is £1,000, which covers your worked hours at the agreed rate and may also include reimbursed expenses or bonuses.
Step 2 – Less employer costs and umbrella margin
Before your gross pay (taxable income) is calculated, certain costs are deducted:
Umbrella margin: a deduction that covers the cost of our employment, payroll, and support services.
Employer’s costs: National Insurance contributions, Apprenticeship Levy, employer’s pension contribution, and holiday pay.
Step 3 – Breaking down your gross pay
Your gross pay is made up of different elements:
Basic pay: at least the National Minimum Wage (for 21+, this is currently £12.21 per hour).
Holiday pay: a minimum of 12.07% of your combined basic pay and commission.
Commission: the balance left over after the basic pay and holiday pay.
Step 4 – Employee deductions
Once gross pay is calculated, the usual employee deductions apply, based on your tax code. In this example we assume the standard 1257L code, giving a yearly personal allowance of £12,570:
PAYE: The first £242 of weekly pay (or £1,048 per month) is tax-free. Earnings above that are taxed at 20% for basic-rate taxpayers (different rates apply in Scotland).
Employee National Insurance: 8% of your eligible earnings.
Pension contributions: 5% of your qualifying earnings in total. You pay 4% directly, with the remaining 1% added via government tax relief through the pension provider.
Step 5 – Worked example (£1,000 income)
Deductions before gross pay:
Umbrella margin: £24.50
Employer’s National Insurance & Apprenticeship Levy: £115.55
Employer’s pension contribution: £21.55
Holiday pay allocation: £90.29
Employee gross pay: £838.40, made up of:
Basic pay: £610.50
Commission: £137.61
Holiday pay (accrued): £90.29
Statutory deductions from gross pay:
PAYE income tax: £119.20
Employee National Insurance: £47.71
Employee pension contribution: £28.74
Net take-home pay: £642.75
Key points to remember
Take-home pay will differ depending on your tax code, pension contributions, and any allowable expenses.
When comparing umbrella companies, compliant providers should produce the same net pay when the same assumptions are used, so be cautious of any that claim otherwise.
Understanding how pay is calculated helps you avoid tax avoidance schemes and identify any hidden deductions. For further guidance, HMRC provides a full breakdown here.