Whether you are new to contracting or are making the move from limited company to umbrella in 2021, you will want to know more about umbrella company costs.

After all, umbrella company costs come directly out of your take home pay, so it’s important to know what you’re paying, what the umbrella fee covers and whether this could unexpectedly change. 

To help, in this guide Umbrella Broker outlines everything contractors need to know about umbrella costs, to ensure you get a fair deal.

What are Umbrella Company costs?

In exchange for employing the contractor and offering them a range of services, every umbrella company charges a fee.

These services and benefits include:

• The umbrella company pays the contractor a salary and calculates and deducts their tax and National Insurance through the PAYE system. This means that the contractor doesn’t have to carry out tricky tax calculations and submit a self-assessment as this is all taken care of for them.
• The umbrella company covers the contractor with required insurance, such as employer’s liability insurance. Many will also provide further insurance as required by the contract.
• The umbrella company takes care of tasks such as paperwork, admin, invoicing and processing expenses on the contractor’s behalf.
• The umbrella company offers the contractor statutory benefits such as holiday pay, sick leave, a workplace pension and maternity or paternity leave.
• Operating through an umbrella company means that the contractor is exempt from IR35.

How much do Umbrella Companies charge?

Umbrella company fees will vary but start from around £25-30 per week or £80 – £130 per month.

Umbrella companies can charge their fees in two different ways:

• Fixed fees: this is a set amount taken from your pay
• Percentage fees: this is worked out as a percentage of your earnings

It’s important to look at how the umbrella company charges their fees as this can have a big impact on how much you end up taking home.

When do you pay Umbrella fees?

A benefit to paying umbrella company fees is that they are taken from the contractor’s income before it is processed for tax and National Insurance.

This means that you can factor in tax relief to the actual cost of the umbrella company fees.

However, it is worth looking out for some companies that can charge their fees as net fees – this is the figure after tax. If their quote is based on the higher rate threshold of 40%, you can end up paying more. This means it’s usually best to stick to gross fees when choosing an umbrella company, when the fee is taken before tax.

Other Umbrella costs

Next, it’s important to consider whether you will incur any additional, unexpected costs. After all, no contractor wants to join an umbrella company only to find that it’s unaffordable with the added extras they require.

Additional umbrella costs can include one-off fees for joining or leaving the umbrella company.

Other additional costs can be incurred for insurance. Although public and employer’s liability insurance and professional indemnity insurance cover are required for most contracts and paid for by the umbrella company, some providers won’t cover these as standard and you will have to pay extra.

Other umbrella companies will charge additional fees for things like same day payments, extra admin tasks and for things like processing expenses, which are all factors you will need to consider.

What to look out for

When comparing umbrella company costs there are some red flags contractors should look out for.

For example, an umbrella company that claims to help you keep 80 – 95% of your take home pay and remain tax compliant is making false claims. HMRC have stated that this is not the case due to the fact that the basic rate of income tax stands at 20% and National Insurance contributions are also taken from earnings.

Umbrella companies that say they will only process part of your salary through payroll to help you pay less in tax are also not HMRC compliant. At the end of the day, it will be the contractor that is held responsible if they investigated by HMRC, not the umbrella company.

Avoid any umbrella company that says it will pay the contractor through a loan, credit or investment payment. Some umbrella companies will do this as these systems are not subject to income tax. However, HMRC have again stated that this is tax avoidance and that the contractor will be penalised if caught out. 

Finally, steer clear of any umbrella company that says it will route payments through several other companies before it gets to the contractor.

It is important to look out for these red flags when comparing umbrella costs. Don’t be fooled by umbrella companies that claim to be able to save you on tax as these companies aren’t HMRC compliant and it will be the contractor that pays if they are found out.