Price is always an important factor when you’re looking for a new umbrella provider. But it shouldn’t be your sole consideration. Here we explain why choosing a cheap umbrella isn’t always the best option in real terms.
Which is the cheapest umbrella company in the UK?
To compare the costs of several umbrella companies, you should find out how much each company charges per week or month. This is known as their ‘margin’.
From our experience, you can pay anything from £10 to over £40 per week for a PAYE umbrella service. Our partners at UCUK charge a mere £10 per week, for example. An average margin is roughly £20 per week.
You might assume it is easy to find an umbrella company’s margin by simple looking at their websites, but this isn’t the case. Some umbrellas are transparent and publish their fees online, but many do not.
A lot of umbrella providers ask you to fill in a form so that they can send you a ‘net take home pay illustration’. This breaks down the deductions which are made from your assignment rate, before you receive your post-tax pay.
You can read our guide to umbrella company deductions, including employment costs here.
The golden rule about umbrella company costs
All UK-based PAYE umbrellas should work in the same way. The only difference in costs between providers should be the weekly or monthly fee they charge to use their service.
In other words, the amount of tax and National Insurance deducted from your contract income should be identical, as the rates are set by HMRC.
Similarily, if you contribute to an umbrella company workplace pension, the contributions should be the same.
Unfortunately, umbrella companies are not regulated. As a result, some unscrupulous providers keep more of their employees’ pay than they should. Unfortunately, such practices are often not unlawful. So, as a potential umbrella employee, you need to know what to look out for.
You think you have found a cheap, cost-effective provider, but they end up costing you more in real terms than the most ‘expensive’ umbrella.
Why the cheapest umbrella might turn out to be expensive!
As we have already explained, the only variable cost between umbrella companies should be their margin (or fee).
Unfortunately, the way net home pay is calculated is fairly complicated. There are so many elements to a payslip. You can see an example here to see what we mean.
As a result, a payslip can hide all sorts of malpractice.
Here are some well-known ways an umbrella company can cost you a lot of money – potentially thousands per year.
Using a non-PAYE umbrella scheme
The biggest mistake you can make is to use a non-UK non-PAYE umbrella ‘scheme’. These are tax avoidance vehicles – often based offshore. They will usually offer you net take home pay returns of 80% or more – where a legitimate return will only ever be between 55-65% of your gross pay. Avoid tax avoidance schemes like the plague. You could find yourself in real trouble with HMRC in a few years’ time when they demand the tax you should have paid in the first place.
Salary skimming
Another method of profiting from umbrella employees is a practice known as salary skimming. This is when a regular additional charge is made to your payslips. This could be as simple as adding £5 per week to your ’employment costs’. Over the year, you can see that a seemingly cheap umbrella is actually fairly expensive after all!
Withholding holiday pay
This is a very well known example – and it is perfectly legal. If you decide to receive your holiday on an accrued basis, this means that the umbrella company holds on to this portion of your pay on your behalf. You can then receive a lump sum when you take leave. Unfortunately, you might lose your entitlement if you don’t request it by the end of the tax year. Or if you leave the umbrella, you might not realise that you never received the holiday pay you were due.
Make sure you know how much holiday pay you are due, otherwise your umbrella might pocket it. Even better, use an umbrella which only provides ‘advanced’ (rolled up) holiday pay – which means you receive it every time you are paid.
Charging the Apprenticeship Levy when it shouldn’t be deducted
All companies that have a pay bill of £3m or more per year have to charge a fixed 0.5% to pay for the Apprenticeship Levy. Some umbrellas make this deduction even if they’re not obliged to do so and keep the difference. Although this is a relatively small percentage of your income, it amounts to hundreds over the course of the year.
More umbrella tricks which may cost you money
For some more examples of things you need to be aware of – read our guide to steering clear of dodgy umbrella providers.
What about if you don’t have a choice over the umbrella you use?
Another potential problem when it comes to choosing the best value umbrella is the concept of the preferred supplier list (PSL). This is where a recruitment agency works with a select number of umbrella companies to the exclusion of many good value providers.
The agency will receive a kickback for each individual they refer to one of their umbrella partners. As a result, you’re very unlikely to find the cheapest umbrella providers when a PSL is involved, as the kickbacks have to be funded somehow!
Some final thoughts to help you choose a cost-effective umbrella
- Only use a UK-based PAYE umbrella scheme. Never be tempted to sign up for a tax avoidance vehicle.
- Price isn’t the only thing to look out for. Read our list of 15 ways to compare umbrella companies.
- Although not a guarantee that an umbrella is squeaky clean, make sure the umbrella is accredited by the FCSA, or has had a Professional Passport audit.
- Make sure you know exactly how much the umbrella’s weekly or monthly margin (fee) is.
- Get familiar with how net take home pay is calculated.
- Keep an eye on your payslips and don’t be afraid to ask your account manager to explain anything you don’t understand.
- Try out these free tools to verify your paylips.
Do you want to find an umbrella now?
All of the umbrella providers in our directory have been around for many years and are FCSA accredited. Make sure you find out what their weekly or monthly charges are before signing up.
Churchill Knight Umbrella - Recommended for Contractors!
