Client wants me to work through an umbrella company — what does that mean for tax?

Yes, your understanding is broadly right. Through an umbrella, you become an employee of the umbrella company for that assignment. The umbrella invoices the agency or client, receives the assignment rate, and pays you through PAYE. Income tax and employee National Insurance are deducted before you are paid, and you will normally receive a payslip and a P45 or P60. You lose the salary-and-dividend flexibility you have through your own limited company for that income.

The headline rate is not your gross pay. From the assignment rate, the umbrella first deducts its margin and the employment costs it bears as your employer, including employer National Insurance and, where applicable, the apprenticeship levy. What remains is your gross taxable pay, from which your own tax and National Insurance are then deducted. That two-stage deduction is why take-home pay can look noticeably lower than the same rate paid to your company.

You can keep your limited company open while working through an umbrella, and you can run both routes at the same time if you keep the work and money separate. If you still invoice smaller direct clients through your company, it is trading, not dormant, even if that work is small. If it has no transactions at all, it may be dormant for Companies House purposes, but filing duties remain. Do not mix umbrella payslips into your company accounts.

For the umbrella assignment itself, IR35 is effectively taken off the table in the usual sense, because you are already taxed as an employee through PAYE. That does not remove IR35 from your other work: assignments still run through your limited company must be assessed on their own facts. You also gain employment rights through the umbrella, including holiday pay and pension auto-enrolment, although holiday pay treatment varies.

Expenses work differently as an employee. You cannot claim the same broad range of business expenses through an umbrella as you can through your own company, and travel and subsistence relief is tightly restricted. Before signing, ask for a worked example based on your assignment rate, showing the margin, employer costs, gross pay, tax, employee National Insurance, pension and holiday pay treatment, and any same-day payment fees. Avoid any arrangement promising an unusually high take-home percentage, offshore payments, or loan-based pay: those are warning signs HMRC has repeatedly challenged. Check the first few payslips line by line.