Every umbrella company charges the contractor a fee in exchange for the range of services and benefits they provide.

Although the umbrella companies’ fee is deducted from the contractors take home pay, they receive benefits such as a workplace pension, holiday pay, sick leave, a salary and insurance cover in return, meaning there’s no need to pay for these out of your own pocket. 

When choosing an umbrella company, the fees they charge inevitably play a large part in the decision-making process. To help, Umbrella Broker have put together this guide to umbrella fees, from how they work to how much contractors can expect to pay in 2021.

Do umbrella companies charge a fee?

Yes – every umbrella company charges fees.

Umbrella fees are paid by the contractor who in return receives a range of benefits.

These include:

• Statutory rights: umbrella contractors are entitled to statutory rights including sick pay, holiday pay, maternity/paternity and a workplace pension
• PAYE tax contributions: as an employee of the umbrella company the contractor’s tax and National Insurance obligations are taken care of. This means no tricky tax calculations required. So, although limited company contractors don’t pay an umbrella fee, many pay for the services of an accountant to help with self-assessment tax returns.
• Insurance: umbrella companies cover contractors under Umbrella Companies Professional Liability and Professional Indemnity Insurance, meaning their compulsory insurance requirements are taken care of. Again, this is a cost that the contractor therefore does not need to worry about.
• Admin and paperwork: finally, the umbrella company will also take care of the business side of contracting. This includes taking on tasks such as invoicing the client and chasing payments as well as any paperwork and admin required,

That’s why umbrella companies charge fees and what the contractor receives in return, so how much can the contractor expect to pay?

How much do contractors pay in Umbrella Company fees?

The good news for contractors is that the umbrella company market is highly competitive, meaning the contractor can expect to pay around the £20-£30 mark per week, or £80-£120 per month.

However, it’s important to remember that umbrella company fees will vary depending on the services and benefits required by the contractor.

After all, a contractor that requires minimal services from the company can expect to pay the lower amount. However, a contractor that needs a range of benefits and additional services will likely pay higher umbrella company fees.

How are umbrella company fees charged?

The next thing to be aware of when it comes to umbrella fees is how companies charge them.

There are two main ways an umbrella company can charge their fees which can have a big impact on how much the contractor will end up paying.

These are as follows:

• Fixed fees: here, an umbrella company charges the contractor a fixed fee, whether this is on a weekly or monthly basis. This is taken off the contractor’s income before it is processed for PAYE.
• Percentage fees: here, on the other hand, the umbrella fee is worked out and charged as a percentage of the contractor’s invoice value. This is usually the worst option for contractors who can end up paying higher fees merely if their contractor rate increases whilst receiving the same level of service in return.

It is for this reason that the majority of contractors prefer to pay fixed fees as it means that they won’t be required to pay more in fees if they start to earn more.

As well as fixed vs percentage fees, umbrella costs can also be charged as net or gross fees.

• Gross fees: here, the contractor will be charged their fee before tax relief has been applied
• Net fees: however, with net fees, the contractor will be charged the fee after tax relief has been charged

Again, this can have a big impact on how much you end up paying in fees, meaning it’s important to take into consideration.

After all, if an umbrella company gives you a net fee quote using the higher tax threshold of 40% this can be misleading and wrong if the tax band doesn’t apply to you.

What additional costs does the umbrella company charge?

Some umbrella companies will also charge the contractor additional costs for certain services. It is important to check this when choosing an umbrella company as this can have a direct impact on how much you end up paying.

• Sign-up fees: some umbrella companies charge contractors a one-off fee for joining the company
• Exit fees: likewise, some can also charge a one-off fee for exiting the company
• Charges for additional benefits or admin tasks: some umbrella companies will also charge fees for additional tasks such as same-day payments or admin tasks like processing expenses.
• Charges for insurance cover: although the umbrella company is legally required to cover the contractor with Umbrella Companies Professional Liability and Professional Indemnity Insurance, some will also charge the contractor extra for additional types of insurance.