What are umbrella company margins?

As an umbrella employee, you will see an entry for your provider’s ‘margin’ on your payslips. Here we explain what an umbrella company’s margin is, and how much it will typically set you back.

Umbrella company margins in a nutshell

Complaint umbrella companies generate income for themselves through a margin they deduct each time they process the payroll of an employee.

The margin is the only income umbrella companies generate for themselves and the rest of the deductions (outlined below) are sent to HMRC (or external financial organisation such as pension payments).

The deductions an umbrella company employee should expect to see in their payslips are:

• Umbrella company margin (taken from gross funds)
• Income tax
• Employee’s National Insurance
• Employment costs (the Apprenticeship Levy and Employer’s National Insurance)
• Pension contributions
• Student loan repayments

It is important to remember that all compliant umbrella companies will process your payroll in the same way. Therefore, if you approach two compliant umbrellas, both with a £25 per week margin, you should expect the same net salary from each – to the penny.

Why is it called a “margin” and not a “fee”?

Umbrella companies do not charge a fee for processing your payroll because it would be subjected to VAT if they did.

Despite this technicality, you will often see the word ‘fee’ used interchangeably with ‘margin’, on business news sites.

Instead, umbrella companies deduct a margin from the funds they receive from your recruitment agency (or directly from your end-client) before processing your payroll and transferring your net salary to your personal bank account.

How do umbrella companies calculate the margin they deduct?

Typically, umbrella companies deduct margins in two ways:

Fixed Margin

The umbrella will deduct a fixed amount each time they process an employee’s payroll. This amount is taken from the gross funds before any deductions are made (PAYE) – meaning the employee will pay a little less tax. Fixed margins will vary between umbrella companies but are typically in the region of £15 to £30 per week. The umbrella company marketplace is saturated with over 500 providers in the UK. Therefore, there are plenty of competitive offers out there if you shop around.

Percentage Margin

This type of margin is rare nowadays, but some umbrella companies will deduct their margin as a percentage of the total amount of funds they are processing. For example, a 2.5% margin based on a weekly gross payment of £1,000 would result in a margin of £25. Percentages could prove cost-effective or expensive depending on an employee’s pay rate.

There have been recent cases of high-profile umbrella companies retaining more than just the margin

Most UK-based umbrella companies are fully compliant with HMRC’s rules and regulations and pay workers ethically and accurately. However, there have recently been a few cases of high-profile umbrella companies unethically retaining more money for themselves (more than just the margin), leaving employees with less hard-earned money.

A well-known FCSA-accredited umbrella company was recently accused of salary skimming.

In this practice, the umbrella company retained more than just the margin but disguised how they do this (possibly by inflating other lawful deductions on an employee’s payslip such as tax or National Insurance).

As a result, the Freelancer and Contractor Services Association (FCSA), one of the UK’s most respected professional bodies dedicated to ensuring the supply chain of temporary workers is compliant, has suspected the umbrella for malpractice. However, this isn’t the first time an FCSA-accredited umbrella has been in the spotlight.

Holiday Pay is another method unethical umbrella companies have been accused of retaining additional income for themselves.

When working through an umbrella, you are entitled to holiday pay, which will be processed each time you are paid or accrued and paid in a lump sum later.

However, it was recently found that a small number of so-called “compliant” umbrellas have been retaining employees’ holiday pay against their knowledge.

Therefore, it’s essential to understand that the umbrella company’s margin should be the only income they keep for themselves. If you notice a reduction in pay retention, it could signify unethical practices.

The umbrella company with the lowest margin might not be the best option

When searching for an umbrella company, consider the margins out there. After all, if you choose an umbrella with a £15 per week margin compared to one with a £30 per week margin, you will retain more of your net salary each time you’re paid. However, don’t prioritise the margin as the main factor in choosing one umbrella company over another.

Due to the competitive nature of the umbrella company sector, many providers offer far more than just payroll. Therefore, choosing an umbrella with a slightly higher margin than others may prove better value for money. For example, some umbrellas will also include the following in their service:

• Same Day Faster Payments
• Access to a state-of-the-art portal to make viewing payslips and submitting timesheets easy
• Comprehensive insurance cover
• Around-the-clock support
• Access to an employee discount scheme, such as Perkbox
• Referral rewards for when you recommend the umbrellas service to friends or colleagues

With the above in mind, assess whether an umbrella company will provide you with good value for money before completing the registration process. If you only require payroll and nothing else, undoubtedly, you’ll be interested in picking the umbrella with the most competitive margin. However, if you want to benefit from insurance and additional features, you may be open to paying a higher weekly margin.

Whichever umbrella you choose – make sure they’re compliant, have a perfect track record and are accredited by a renowned professional body such as the FCSA or Professional Passport. Never feel pressured into using an umbrella company that you don’t want to, and always conduct thorough due diligence.

If you’re working through an agency, ask to see their Preferred Supplier List (PSL)

Many leading recruitment agencies have strong relationships with reliable umbrella companies. As a result, it’s worth asking your agency for their Preferred Supplier List (PSL) – a list that contains umbrella companies they recommend you use. It’s common for umbrella companies to offer temporary workers referred by a partnered agency a preferential margin (for example, a £15 per week margin compared to the umbrella’s usual weekly margin of £25).

On the other hand, some agencies may profit by referring you to an umbrella because the umbrella will pay a referral fee to the agency each time a referred worker is paid (often referred to as a rebate payment). In this scenario, the rebate will unofficially be passed on to you, the worker, driving up the umbrella’s margin.

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