Last updated: 14 October 2026
Does a deemed payment apply if you work through an umbrella company?
No. The IR35 deemed payment is a calculation made by your own personal service company (PSC) when it decides that IR35 applies to a contract. If you work through an umbrella company, you’re its employee, and the umbrella runs PAYE on all your pay, so IR35 and the deemed payment calculation don’t apply. You pay income tax and employee NICs on everything you earn, and the umbrella’s employer NIC and fees are paid out of the assignment rate.
Umbrella company vs limited company
| Point | Umbrella company | Your own limited company |
| Who employs you | The umbrella | Your company |
| IR35 applies? | No | Yes, if the contract would be employment |
| Who decides status | Not relevant | The client if medium or large; your company if the client is small |
| How you’re taxed | PAYE on all pay | Salary and dividends outside IR35; deemed payment or fee-payer PAYE inside |
| Expenses | Very limited, home-to-work travel not allowed | More scope outside IR35 |
When a deemed payment does arise
If you work through your own PSC for a small private client and the contract falls inside IR35, your company must calculate a deemed payment at 5 April each year (or earlier if your company stops trading). It starts with the contract income, deducts a 5% flat allowance, salary already paid, employer NIC and pension contributions, and treats the rest as extra salary, with PAYE due by 19 or 22 April. For medium and large clients, or public sector clients, the client decides status and the fee payer deducts PAYE instead.
New rules for umbrella companies from April 2026
From 6 April 2026, the recruitment agency that contracts with the end client is jointly and severally liable with the umbrella for any PAYE the umbrella fails to pay. If there’s no agency, the end client is liable. This aims to stop non-compliant umbrellas and so-called mini umbrella company fraud. For workers, it shouldn’t change how your pay is taxed, but check your payslip shows full PAYE deductions.
Example
A contractor works through an umbrella on a £500 a day assignment. The umbrella deducts its margin, employer NIC at 15% on earnings over £5,000 a year, and the apprenticeship levy if it applies. The rest is your gross pay, from which income tax and employee NICs are deducted. Holiday pay is either paid as you go or accrued.
Red flags
- Pay that looks much higher than other umbrellas’ illustrations
- Part of your pay labelled as a loan, bonus or “expenses” with no tax
- Payslips that don’t match bank payments
If something looks too good to be true, it may be a tax avoidance scheme, and HMRC can pursue you for the tax.
Moving between the two
If a client decides a contract is inside IR35, many contractors close or pause their PSC and switch to an umbrella for that assignment. Before you do, consider any profits left in your company, how you’ll extract them, and whether a later contract might fall outside IR35.
Frequently asked questions
Should I use an umbrella or a PSC inside IR35?
Often an umbrella is simpler; compare net pay with advice.
Can an umbrella pay me dividends?
No, you’re an employee.
Can I claim travel through an umbrella?
Not for ordinary commuting, under employment rules.
Is the 5% allowance available in an umbrella?
No, it only applies to deemed payments.
Related: the director’s loan tax charge and employment expense claims.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with IR35 and umbrella companies. See our contractor accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
