Worked example: £1,250 umbrella income, standard tax code (1257L), tax year 2026/27
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 £1,250 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 £1,250, 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 employment costs are deducted:
Umbrella margin: for us, for our role.
Employer’s costs: National Insurance contributions, Apprenticeship Levy, Employer’s pension contribution, and holiday pay.
Employer’s pension saving: Calculated as 15.5% of the employer’s 8% contribution to your workplace pension, retained from the saving on employer’s National Insurance (“NI”) and Apprenticeship Levy.
Step 3 – Breaking down your gross pay
Your gross pay is made up of different elements:
Basic pay: at least the National Living Wage (for 21+, this is currently £12.71 per hour).
Holiday pay: a minimum of 12.07% of your combined basic pay and bonus.
Bonus: 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.
Step 5 – Worked example (£1,250 income)
Deductions before gross pay:
Umbrella margin: £23.00
Employer’s National Insurance & Apprenticeship Levy: £141.70
Employer’s 8% pension contribution: £67.76
Employer’s pension saving: £10.50
Employee gross pay: £1007.04, made up of:
Basic pay: £508.40
Bonus: £390.20
Holiday pay: £108.45
Statutory deductions from gross pay:
PAYE income tax: £161.00
Employee National Insurance: £58.80
Net take-home pay: £787.24
Key points to remember
Take-home pay will differ depending on your tax code, pension arrangement, any allowable expenses, or other deductions.
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.