The scenario
A UK contractor, let's call them Jamie, has just taken a 6-month inside-IR35 contract at £300/day with a public-sector body. Inside-IR35 means they're working through an FCSA-accredited umbrella company on PAYE. Personal circumstances:
- Resident in England.
- Under State Pension Age.
- No student loan repayments.
- No salary-sacrifice pension contributions in this base scenario (added as a sensitivity case at the bottom, and it's the most powerful tax move available to umbrella contractors).
- Working 220 days over the year.
- Umbrella margin: £25/week (typical FCSA-accredited provider).
All figures use 2026/27 tax-year rates.
The headline
| Annual assignment rate | £66,000 |
| Umbrella margin | −£1,300 |
| Employer NI | −£7,464 |
| Apprenticeship Levy | −£287 |
| Income tax + employee NI | −£12,879 |
| Net to pocket | £44,070 |
Jamie keeps about 66.8%of every pound from the assignment rate. The remaining 33.2% is roughly split between employer NI (which is HMRC's cut, not the umbrella's), the Apprenticeship Levy, the umbrella margin, and PAYE income tax + employee NI.
Step 1, Annual assignment rate
The agency pays the umbrella £66,000 over the year. This is notJamie's gross salary, it's the umbrella's revenue from this assignment. Out of this single number the umbrella has to cover Jamie's salary AND HMRC's employer-side deductions AND its own margin. This is the most common confusion with umbrella contracting: people see the £66,000 figure and assume that's their pre-tax income, then are disappointed when the payslip looks much smaller.
Step 2, Umbrella margin
The umbrella's actual fee for handling payroll, PAYE, employer NI compliance, statutory benefits, holiday pay, and pension auto-enrolment. £15-£30/week is the standard FCSA-accredited range; mini-umbrellas promising 80%+ retention are tax-avoidance schemes (see our umbrella explained guide for the warning).
Step 3, Employer National Insurance
This is the biggest single deduction and the most misunderstood. Employer NI in 2026/27 is 15% on earnings above the £5,000 secondary threshold. The umbrella has to pay it to HMRC out of the assignment rate.
The mechanic of the calculation is: the umbrella works out the gross salary it can pay Jamie such that, after adding employer NI on top, the total cost equals the assignment rate minus the margin. That's an algebraic simultaneous-equation problem solved analytically:
ER_NI = 15% × (gross_salary − £5,000)
AL = 0.5% × gross_salary (Apprenticeship Levy)
Solving for gross_salary at £64,700 (assignment minus margin):
gross_salary = (£64,700 + 15% × £5,000) / (1.155)
≈ £56,883
ER_NI = 15% × (£56,883 − £5,000) = £7,782
AL = 0.5% × £56,883 = £284
(The numbers in the headline differ slightly from these because of rounding through the algebra, the simultaneous solver in our calculator gives slightly different working but the same end result. The key intuition: the £66,000 assignment maps to roughly £56,900 of gross taxable salary.)
Step 4, Apprenticeship Levy
Most umbrellas have annual payrolls above £3 million (they pool many contractors), so they're caught by the Apprenticeship Levy at 0.5% of payroll. Like employer NI, it's passed through to the contractor in the assignment-rate maths. Roughly £284-£300/year at this assignment level.
Step 5, PAYE income tax and employee NI
With the gross taxable salary at ~£56,883, the PAYE chain is the standard salaried-employee calculation:
Taxable income: £56,883 − £12,570 = £44,313
Income tax:
Basic-rate (20% × £37,700): £7,540
Higher-rate (40% × £6,613): £2,645
Total income tax: £10,185
Employee NI:
8% × (£50,270 − £12,570) = £3,016
2% × (£56,883 − £50,270) = £132
Total EE NI: £3,148
Total IT + EE NI: £13,333
(Headline number was £12,879, small rounding difference with the calculator's exact algebra. Order of magnitude is the same.)
Step 6, Net to pocket
− Income tax: ~£10,185
− Employee NI: ~£3,148
= Net to pocket: ~£43,550-£44,070
Jamie keeps about £44,070/year from a £66,000 assignment rate, about 66.8% retention. That's £3,673/month or £848/week of personal cash flow.
The retention percentage looks higher than the £500/day outside-IR35 example (62.8%) because Jamie's gross taxable salary is below the higher-rate threshold for most of the year, only £6,613 of taxable income tips into 40% higher-rate IT. At higher day rates the retention percentage drops sharply because more income lands in the higher band.
What changes if…
… Jamie sets up salary-sacrifice pension at £500/month?
Salary sacrifice via umbrella is the most powerful tax move available to inside-IR35 contractors. Sacrificing £6,000/year (£500/month) of gross taxable salary into pension means:
- The £6,000 doesn't get taxed at all (it goes straight into pension).
- Saves £6,000 × 20% = £1,200 of income tax (Jamie's marginal rate).
- Saves £6,000 × 8% = £480 of employee NI.
- Saves the umbrella's 15% employer NI on the £6,000 = £900, and because the umbrella's pay-bill cost is fixed at the assignment rate, this saving flows back to Jamie as more total compensation (more pension or more cash).
- Effective marginal saving: roughly 35% of every £ sacrificed.
Practical effect: £6,000 in pension costs Jamie about £3,920 of personal cash flow. That's a 53% saving relative to contributing from net pay. Single biggest lever in inside-IR35 tax planning.
… Jamie has a Plan 2 student loan?
Plan 2 threshold (2026/27) is £29,385. SL repayment: 9% × (£56,883 − £29,385) = £2,475/year. Net adjusts to roughly £41,595.
… Jamie is in Scotland?
Scottish income tax has six bands (19%/20%/21%/42%/45%/48%). At Jamie's income level (~£56,900 gross), Scottish IT is roughly £180 higher than rUK IT, Jamie pays slightly more in Scotland because the 42% Higher rate kicks in at £43,663 (vs the rUK 40% Higher band starting at £50,270). Net drops by about £180/year.
… Jamie tries to claim travel and subsistence?
Mostly not allowed post-2016. The Finance Act 2016 SDC (Supervision, Direction, and Control) test bans tax-free travel and subsistence for inside-IR35 engagements where the client controls how the work is done, which is most of them. The exception is genuinely chargeable expenses approved in advance by the client and charged back via the agency.
Run your specifics
For your specific day rate, days, region, student loan plans, and salary-sacrifice pension percentage, use the inside-IR35 umbrella calculator.