Do you want to avoid the hassle, financial risk, and ongoing admin that running your own limited company entails? Or, have you been prevented from using your company due to the Off-Payroll changes, and need to find an umbrella provider instead?
Joining an umbrella company may be the way to go.
The catch is that convenience comes at a price. Umbrella companies charge fees for their services. And these fees ultimately come out of your earnings, which affects how much money you’ll take home.
Understandably, you’ll want to keep these fees as low as possible, so you can keep more of your hard-earned cash. With this in mind, here’s a rundown of everything you need to know about umbrella company fees:
- The different types of fee structures
- Hidden costs to look out for
- Pitfalls to avoid
What fees do umbrella companies charge?
Umbrella companies typically charge for their services in one of two ways:
- A fixed fee
- A percentage fee
This fee is also known as the margin, because it’s umbrella companies’ main source of income.
A fixed fee is a set amount of money which the umbrella company charges weekly or monthly. So, for instance, they might charge you £25 per week, or £100 a month.
Conversely, a percentage fee is a cut of your invoices. The fee is usually capped, so you won’t be charged more than a certain amount. That said, it can still be a hefty sum, especially if you’re a high earner.
Because percentage fees can take a big chunk of your income and are hard to justify — after all, an umbrella company does the exact same amount of work whether you earn £100 or £100,000 — they’re unpopular.
Unsurprisingly, it’s increasingly rare for umbrella companies to charge percentage fees.
How much are umbrella company fees on average?
Not all umbrella companies publish their fees online. That said, the umbrella company market is very competitive. As a result, fees have remained fairly stable over the past 10 years and are usually quite reasonable.
Here’s a table with five popular umbrella companies’ fees. You’ll note that they’re all in the same ballpark:
Weekly fixed fee
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It’s worth pointing out that the fee, or margin, is the only way legitimate umbrella companies should compete with each other. Margin aside, your take-home pay should be exactly the same regardless of the umbrella company, because the same income tax and national insurance deductions apply.
Beware of companies that advertise ‘tax-efficient’ payment structures that supposedly boost your take home pay, especially if these involve:
- Only passing a portion of your salary through HMRC’s PAYE (pay as you earn) system
- Paying you via a capital advance or share ownership agreement
- Paying you through an offshore structure
HMRC consider these schemes to be ‘disguised remuneration’ and they’re cracking down on them.
On offshore structures, for instance, HMRC have unequivocally said:
“They are contrived arrangements that pay scheme users their income in the form of loans, normally routed through … a low or no tax jurisdiction, with the only purpose being to avoid income tax and NICs [National Insurance contributions].
“The loans are provided on terms that mean they are not repaid in practice, and the amounts paid by way of a loan are no different to normal income and are — and have always been — taxable.”
Bottom line, if you sign up for one of these schemes and HMRC decide to investigate (which is becoming more likely than you’d think), you could find yourself in a world of trouble.
How do umbrella companies collect their fees?
Typically, umbrella companies deal with the end-client on your behalf. They then pass the cost of doing this on to you and collect their fee from your client earnings.
The good news is that they deduct the fee before they work out your taxable income. So, in real terms, you get some of the fee back by paying less tax.
Let’s say you work with an umbrella company that charges a fixed fee of £100 a month. During April 2020, you earn £3,500.
The company would deduct the £100 before calculating how much you should be taxed on. So they’d work out your take-home pay on £3,400, not on £3,500.
Sadly, this has encouraged some umbrella companies to misrepresent their margin by quoting net fees instead of gross fees. The net fee is the umbrella company’s fee, less the tax you save because it’s deducted from your overall earnings.
The problem with this approach is that many umbrella companies base the net fee on a higher earner that falls in the 40% or 45% tax bracket.
This makes the fee seem very low and the company more attractive. But if you earn less than £50,000 and, so, fall in the 20% tax bracket, you’ll actually be paying more.
Worse, it’s more difficult for you to compare umbrella companies’ margins and how these affect your take-home pay. For this reason, you should always make sure you’re quoted the gross fee — the fee before tax deductions.
Check the umbrella company’s fine print or ask them what their gross fees are outright.
A note on take-home pay calculators
Some umbrella companies also have online take-home pay calculators you can use to work out how much money you’d get after fees, income tax, and other deductions.
Here again, you may be misled, because calculators work out your take-home pay using assumptions that might not apply to you, such as:
- Projected earnings. These affect which tax bracket you fall in
- Expense claims. The rules around this have tightened significantly, and also depend on your relationship with the end-client. If you’re considered to be under your client’s supervision, direction, or control, you can’t claim much, save in a limited number of exceptions
- Holiday pay. The umbrella company may add 12.07% to your gross taxable pay. Some umbrella companies may let you take paid days off instead. In 2019, a teacher successfully challenged the 12.07% rule in the Court of Appeal. But whether this will affect how umbrella companies give paid holidays moving forward remains to be seen
- Pension contributions. Umbrella companies are employers, so they must enrol you in a group pension scheme. However, online calculators rarely account for pension contributions, because they’re a percentage of your earnings, which makes it difficult to make assumptions
Given these caveats, you should only ever use take-home pay calculators for rough comparisons. Bear in mind that your actual take-home pay may look very different.
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Don’t forget to check for hidden costs
While margin should be umbrella companies’ main source of income, some also have additional costs that could make a bigger dent in your take-home pay.
In particular, watch out for:
Sign up fees
This is a fee you have to pay simply to join the umbrella company
These would apply if you decide to stop working through the umbrella company or switch to another one
Surcharges for insurance, expense processing, and other admin (producing your P60, for example)
As your employer, an umbrella company must have employers’ liability insurance by law. And while professional indemnity and public liability insurance aren’t legal requirements, most end-clients will need proof they’re in place before you can start a contract.
Similarly, all employers must provide their employees with payslips and P60s.
Charging extra for something that is legally required — or which you need in order to be able to work — is underhanded, to say the least.
Surcharges for same-day payments
Most businesses these days use the faster payments system. This allows payments of up to £250,000 to be made round the clock at no extra cost to recipients. The money should also reach your account almost instantly (and at the latest by the end of the same day).
This means there’s no reason to charge you extra for same-day payments, if not to make a profit.
Price is important, but it’s not the be-all-end-all when choosing an umbrella company
You work hard for your money. So it’s understandable that you’d want to pay as little in fees as you possibly can.
That said, don’t make it all about price.
You’re going to be dealing with the umbrella company several times a week, if not on a daily basis. And your relationship with them can make contracting a great experience or a lousy one. So, while it’s good sense to shop around, don’t confuse cheap with good value.
A reputable umbrella company will treat you fairly, make getting paid as smooth and hassle-free as possible, and have your back if things go awry.
All other things being equal, isn’t that worth paying a little extra for?
Need more help choosing an umbrella company?
Try these extra guides, written by the Contract Eye team:
- The top 20 things to consider when choosing an umbrella company
- How do expenses work for umbrella company clients?
- How can you find genuine umbrella company reviews?
- Advantages and disadvantages of working via a PAYE umbrella
SG Umbrella – for Professional Contractors
SG Umbrella is a great umbrella option for contractors. Simply fill in this form, and the team will get back to you with full details. SG is FCSA-accredited, and run by contractor accountants.