The umbrella company route is one taken by thousands of contractors in the UK. After all, it offers them a range of benefits they would otherwise not have access to if they were to take the limited or PAYE routes.
By making the contractor their employee, the umbrella company pays the contractor a salary, calculates and deducts their tax and National Insurance contributions, invoices the client on their behalf, gives them access to statutory benefits and offers them one handy tax code.
However, just as with any exchange, in return, the contractor must pay the company a fee.
As this fee is deducted from the contractor’s earnings, it’s important that they know exactly what they are paying for to ensure they are getting the best deal. After all, nobody wants to lose out on their hard-earned cash.
To help make the process that little bit easier, Umbrella Broker has put together this guide to umbrella company costs with everything you need to know. From how much contractors should be paying, to what services should be received in exchange.
How much can contractors expect to pay in umbrella costs?
Although every company is different and will charge different fees, in general, you can expect to pay between anything upwards of £25 per week. In fact, in the UK most umbrella companies cost between £25 – £30 per week or £80 – £130 per month.
So, what impacts umbrella company fees?
Umbrella company costs will vary depending on the level of service they provide. After all, every contractor requires different things. Some need specialist levels of insurance, others need help with childcare tax credits. Therefore, depending on what benefits and services the company provide you, you will pay more or less.
How do umbrella companies charge their fees?
What’s great about umbrella company fees is that the company deducts its fees before they process a contractor’s income. This means that the contractor will end up paying less in tax which is a welcomed bonus.
When it comes to how the company charges fees, they are either fees are either fixed or percentage fees:
- When it comes to fixed fees, the clue is in the name. The company charges the contractor a fixed fee, either on a weekly or monthly basis, which, as we have mentioned, is taken out the contractor’s income before it is processed for PAYE.
- The other way an umbrella company can charge fees is on a percentage basis. Here, the company charges its fees as a percentage of the contractor’s invoice value. It is useful to note that with this option, contractors can wind up paying higher fees for the same level of service if their income increases. This puts a lot of contractors off this route as they do not wish to pay more money for no extra service, meaning the fixed fee option is the preferred route by many.
The other way that umbrella costs can differ is whether they are charged as net fees or gross fees:
- With gross fees, the contractor is charged the fee before tax relief has been applied
- On the other hand, with net fees, they are charged after tax relief has been applied
It is important to look out for whether the umbrella company charges its fees as net or gross as this can have a big impact on what you will pay.
For example, if the umbrella company offers a net fee quote using the higher tax rate, this can be misleading and inaccurate if this tax band doesn’t apply to you.
Are there any other umbrella company costs?
Some umbrella companies can charge other costs which will impact how much you are paying. When it comes to added costs, it is important to look out for the following:
- Sign-up fees: some umbrella companies charge the contractor a one-time sign-up fee.
- Exit fees: likewise, some umbrella companies can charge a one-time exit fee. Although this is important to consider when joining a company, it is important to bear in mind that this is also a one-time fee, so won’t be a fixed monthly cost.
- Extra charges: as we have already mentioned, many umbrella companies will charge additional costs in exchange for extra perks and benefits. This can include anything from extra charges for same-day payments to increased insurance cover, processing expenses to admin tasks.
Are there any red flags to look out for when it comes to umbrella company costs?
When it comes to umbrella company fees, there are a few red flags to look out for when making your decision to ensure you get the best deal. These include:
- Percentage fees: as we’ve already touched on, percentage fees can mean contractors end up paying much higher fees while the umbrella company is carrying out no additional work. So, whether the contractor is earning £60 or £600 per day, the umbrella company is doing the same amount of work but raking in a higher fee.
- Company background and reputation: although the majority of umbrella companies out there are trustworthy and reputable, like in any industry there are always a few bad apples. That’s why it’s important to do your research to ensure that you work with a company you can trust to deliver excellent services in exchange for your hard-earned cash.
