If you are considering joining an umbrella company, you need to be able to accurately compare the fees charged by different providers.
Your income tax and national insurance deductions should be the same regardless of which umbrella company you choose. But the fees they charge on top of that can make a huge difference to your take-home pay. Which is why it’s worth shopping around before you make a decision.
Here’s a look at how umbrella companies charge fees, plus some key things to watch out for.
Why do umbrella companies charge fees?
Fees — or margin, as it’s known in the business — is how umbrella companies make a profit. It covers their overhead, plus a markup on top, and gets deducted from your salary.
Fees are most umbrella companies’ main source of income. That said, some umbrella companies also charge additional fees (more about this in a minute).
The upside is that HMRC considers your umbrella company’s fees a legitimate expense, so you don’t pay tax on them.
The downside is that they’re an additional deduction over and above your:
- Income tax
- National Insurance contributions
- Pension contributions
- Apprenticeship Levy
- Student loans (if applicable)
At the end of the day, that equals less money in your pocket. This is why you should do your research.
The 2 types of umbrella company fee structure
Most umbrella companies charge you one of two ways:
- A percentage
- A fixed fee
Umbrella companies that charge percentage fees take a cut of your revenue.
Let’s say your umbrella company charges 5% and you earn £5,000 in month 1. The fee due to the umbrella company would be £250.
If you then earned £10,000 in month 2, the fee would be £500. And if you earned £2,500 in month 3, the fee would go down to £125.
Percentage fees are usually capped. Which means what you owe the umbrella company can never go over a pre-agreed amount.
That said, this kind of fee structure is unpopular, and with good reason.
To begin with, percentage fees tend to work out higher than a fixed fee arrangement, even if your revenue is relatively low.
More to the point, an umbrella company has the same administrative burden regardless of whether you earn £50 or £50,000. So it’s hard to justify charging you more just because you’re earning more.
For these two reasons, it’s increasingly rare for umbrella companies to charge percentage fees.
As the name suggests, a fixed fee is a set sum of money.
With a fixed fee, you pay your umbrella company the same amount regardless of how much you earn. So if your umbrella company’s fee is £100, you’ll pay £100 whether you earn £2,500, £5,000, or £10,000.
The upside is that:
- Your expenses are more predictable
- You won’t get penalised for working harder and earning more
Unsurprisingly, fixed fees are the most common type of umbrella company fee structure. That said, there are pitfalls you should watch out for, which we’ll discuss in a minute.
How much do umbrella companies charge?
Despite them being their main point of difference, few umbrella companies make their fees public online. You’ll typically need to ask to find out how much joining a particular umbrella company will set you back.
The good news is that, with hundreds of operators in the market, competition is stiff. And this keeps fees affordable.
We’ve put together a table of leading umbrella companies who publicise their fees, plus a rundown of what they charge:
Our partner firms are highlighted in orange:
|SG Umbrella||£20||£78||FCSA Registered, pay as much as you want into your preferred pension, switch between limited/umbrella with ease.|
|Umbrella Company UK||£12/week (limited time)||Special offer for ITC visitors. Find out more. Same Day Payments. £25m Insurance. No tie-ins.|
|Clarity Umbrella||£25||£95||No entry/exit fees, fast set-up, same-day payments.|
|Simplify||£22.50||£80||Same day payments|
Prices quoted during Jan 2021.
Umbrella company fees: 4 pitfalls to watch out for
While you can find an umbrella company that charges reasonable fees quite easily, there are pitfalls you should be careful to avoid. In particular, watch out for:
- ‘Tax-efficient’ payment structures
- Hidden costs
- Net take-home pay calculators
- Companies that quote net fees in place of gross fees
When ‘tax efficient’ spells trouble
Does the umbrella company’s marketing literature say they can boost your take-home pay with ‘tax-efficient’ payments?
Run a mile (or five).
HMRC’s tax rules are fixed, so fees are the only factor that should make a difference to your take-home pay. If you take fees out of the equation, your take-home pay should work out the same regardless of which umbrella company you’re with.
‘Tax-efficient’ payment structures often fall under HMRC’s definition of ‘disguised remuneration’. HMRC has been cracking down on these types of arrangements. So, if you’re investigated — HMRC’s crackdown makes this an ever more likely scenario — you could find yourself owing back taxes, interest, and eye-watering fines.
Be especially wary of arrangements in which:
- Only some of your salary goes through the PAYE (pay-as-you-earn) system. All your income should go through PAYE
- You’re paid via a capital advance or share ownership agreement
- You’re paid through an offshore structure. Many contractors who have been getting paid via this kind of arrangement are now on the hook for crippling tax bills, courtesy of the infamous loan charge
Watch out for nasty surprises
Some umbrella companies charge additional fees over and above their main fee. Your take-home pay could be lower than you expect as a result, so it’s worth double-checking before you sign up.
Here are four common hidden umbrella company costs:
- Sign up fee
A fee you pay simply for joining the umbrella company
- Exit fee
A fee due if you decide to stop working with your umbrella company, for example because you’re switching
- Administrative surcharges
These can include fees for insurance, processing your expenses, and other basic admin like generating a P60.
An umbrella company is like your employer, so it’s legally bound to have employers’ liability insurance in place and provide you with payslips and a P60. Similarly, while professional indemnity and public liability insurance aren’t legal requirements, most clients will want you to have them.
Bottom line, these surcharges are exploitative, because the umbrella company is making you pay extra to fulfill its legal requirements, or provide you with the documentation you need to be able to work
- Surcharges for same-day payments
Nowadays, the vast majority of businesses use the faster payments system. With faster payments, you can make almost instant transfers of up to £250,000, 24 hours a day, at no cost to the recipient.
Here again, charging extra for something that doesn’t cost the umbrella company extra money or effort feels exploitative
The problem with net take-home pay calculators
Take-home pay calculators are a convenient way to help you work out how much you’re left with after tax, national insurance, umbrella company fees, and other deductions.
Except they might use assumptions that don’t apply to you, which often gives the impression you’ll take home more than you’re actually entitled to.
Common assumptions that can have drastic effects on your projected take-home pay include:
- Projected earnings
These will determine your highest tax bracket and, so, how much tax is deducted via PAYE
- Holiday pay
Umbrella companies can go about this one of two ways:
- Top up your gross taxable pay by 12.07%
- Give you paid days off
In 2019, a teacher successfully challenged the 12.07% rule in the Court of Appeal on the grounds that, if you’re a worker with irregular hours, it results in an unfairly low payout. The case is now in front of the Supreme Court, so whether it’ll affect how umbrella companies deal with holiday pay remains to be seen
- Pension contributions
As your employer, umbrella companies must enrol you in a group pension scheme. But because pension contributions are a percentage of your earnings, it’s difficult to make assumptions. So most net take-home pay calculators leave out this deduction
The upshot is that the amount on an online calculator may be larger than your actual take-home pay. So while net take-home pay calculators are useful for making rough comparisons, there are no guarantees.
If anything, it’s probably safe to assume your take-home pay will be lower than shown.
Gross vs net fees
Some umbrella companies quote their fees net of tax to make them seem lower. But while your umbrella company’s fees are indeed tax-deductible, quoting them net of tax is misleading. And that’s putting it generously.
Let’s say you earned £40,000 in 2020. Your umbrella company’s fee is £100 a month, equal to £1200 a year.
Because the £1,200 is an allowable expense, you can deduct it from your income and pay tax only on £38,800. At 2020/21 rates, that’s a saving of £240.
But, in practice, the full £1,200 has come out of your income and nobody has paid you £240 back. This means it’s not correct to say that the fee is £960 (or £80 a month).
Things get even muddier if the umbrella company advertises a net fee based on the 40% or 45% tax bracket. The fee will be lower, and so more attractive. But if you’re in the 20% tax bracket, you’re going to be paying more.
With this in mind, it’s worth making sure you understand exactly what fee the umbrella company is quoting. Read their terms and conditions to find out if it’s net or gross, or ask them point blank what the gross fee is.
Your umbrella company has a huge impact on your contracting experience. Choose wisely
Nobody wants to pay more than they have to. So, doing your research before settling on an umbrella company makes perfect sense.
That said, price isn’t everything.
At the end of the day, you’re going to be dealing with your umbrella company on the regular, hopefully for a very long time. So while a bargain-basement fee may seem attractive at first glance, it’s always worth paying a bit more for a high-quality, hassle-free experience.
For a list of our partner umbrella providers, simply visit our umbrella company directory.