What are the costs and fees of an umbrella company?

When you choose an umbrella company, your take home pay is a primary concern. You need to make sure you get the best deal, but it can be difficult to compare the costs and fees of an umbrella company because each one takes a different approach to its payment structure and the level of service you’ll receive.

When you join an umbrella company, you become an employee of that company. There are many benefits of working in this way.

Strictly speaking, umbrella companies do not charge fees, if they did then they would have to pay VAT. Instead, the service you perform is charged out to the client and is collected by your umbrella company. The umbrella company then retains a margin for the service it provides, and there could be other costs that need to be recovered too (Apprenticeship Levy, etc).

So, what are the costs and fees of an umbrella company? Zeeshan Anwar at Contractor Umbrella explains.

Typical pricing structures for an umbrella company

The costs and fees of an umbrella company are broadly split into two categories:

1. Fixed fee - where you are charged a fixed weekly or monthly amount for using the services of an umbrella company.

2. Percentage fee - where an umbrella company charges a percentage of your invoice value.

A word of warning when it comes to percentage fees: you could end up spending a small fortune if you win a more lucrative contract. Plus, bear in mind, the umbrella company does exactly the same amount of work whether you complete a £1,000 or £100,000 contract.

How much does an umbrella company normally charge?

The umbrella market is highly competitive and you can expect to pay between £20 and £30 per week, or £80 to £120 per month.

Depending on the umbrella company and the services it offers, you may find some companies who charge more or less. If the umbrella company has a good relationship with an agency, they may do discounted margins.

Online forms and calculators

Most umbrella companies do not publish their fees online and ask you to fill in a form to get a quote. Others offer an online take home pay calculator, where you can quickly work out what you will earn.

However, online calculators tend to make broad assumptions about your expenses claims, holiday pay and other aspects that could affect your bottom line. So, don’t rely on these to compare umbrella companies, contact a firm directly to get an exact quote.

Explaining net and gross fees

Make sure you determine whether a quote is for your net fees, or your gross fees. A net fee is how much it will cost you after tax relief has been applied, so these can initially appear to represent a better deal.

For example, if an umbrella company gives you a net fee quote using the higher tax rate at 40%, this can be misleading and also inaccurate if this rate does not apply to you.

In other words, only compare the gross fees across all the umbrella companies you are considering.

How you're paid

Contractor payslips are complex, but there are three basic stages to your pay under an umbrella company:

1. Your statutory pay: when you work for an umbrella company, your basic wage is calculated as the hours you have worked based on the statutory minimum wage.

2. Holiday pay and expenses: You will also receive holiday pay at 12.07% of your final gross pay figure, which removes the need to give you paid annual leave. You can also be reimbursed for any expenses you incur during your work, and these expenses are paid tax free.

3. Commission payment: Your final pay element is a commission payment. This is calculated as the amount of chargeable time that the client has paid, minus your statutory pay or expenses and any costs incurred by the umbrella company.

Maternity rights and pension contributions

You have to pay PAYE and employees National Insurance on your gross pay (your statutory pay, holiday pay and expenses, and commission).

You are also entitled to maternity rights and will have to pay pension contributions. An umbrella company must automatically enrol all its employees who:

• Are aged between 22 and State Pension Age
• Earn over £8,105* p/a (*subject to change)

Once an employee has been automatically enrolled into the pension scheme, they can stay enrolled but they also have the opportunity to opt-out within a set time period or leave the scheme at a later date.

Extra costs

Some umbrella companies may charge extra fees for additional services, including:

• A sign-up fee.
• Leavers fees, if you decide to stop working with an umbrella company.
• Insurance cover.
• Charges for same day payments.
• Charges for additional operating costs, such as processing expenses.

You need to make sure you understand exactly what you will be charged (and what for) before starting with an umbrella company.

Red flags

The costs and fees of an umbrella company are just one factor you should consider when choosing which one to work with. And, while the vast majority of umbrella companies are ethically sound, there are a few red flags you may want to look out for when making your decision:

1. Percentage fees: as these can prove extremely expensive and incur no additional work for the umbrella company.

2. Same day payment fees: an umbrella company should not hold your money unnecessarily and should pay you without delay.

3. HMRC compliance: ask what awards/accreditations an umbrella company has to prove they are compliant with the latest HMRC rules and regulations.

4. Dedicated liaison officer: ask if you will have one dedicated member of staff to deal with your queries.

5. Online portal: this is extremely useful to submit your timesheets, and prevents any important documentation getting lost in the post.

6. Company background: make sure you only consider established firms with a guaranteed commitment level to their clients.

What next?

It is advised to get a quote and list of services from a few different umbrella companies so that you can compare them. You can find a list of umbrella companies in the ContractorUK Directory.