Whether it’s a phone contract or your annual summer holiday, nobody wants to be caught out by hidden costs. The same is true when it comes to comparing umbrella companies. Unfortunately, some providers aren’t 100% transparent when it comes to the charges.
In this guide, we’ll look at the six areas you should check when searching for umbrella company hidden costs – and how to make sure you’re not caught out.
Why do umbrella companies hide costs?
As regulations become tighter, there are fewer ways in which umbrella companies can stand out from the crowd. The government has ruled that umbrella companies should be classed as an employer, meaning they all have to offer statutory benefits like maternity/paternity, holiday pay and sick pay as standard – alongside a workplace pension.
The result? Aside from added benefits like discount schemes, umbrella companies typically compete by trying to offer low fees. With that in mind, they will do their best to entice you with a fee that’s as low as possible. Unfortunately, those fees aren’t always as good as they seem.
Once you sign up, you can be hit with hidden costs – or just a much higher fee altogether. Here are six of the most common umbrella company hidden costs.
1. Net fees
When advertising their fees, umbrella companies can present them as either gross fees or net fees. Gross fee refers to the fee an umbrella company will take from your monthly income before processing it for tax and national insurance. It’s an honest representation of how much money the umbrella company will make from you.
A net fee, on the other hand, is how much it will cost you as a deduction from your take-home pay – after tax. So, if an umbrella company charged you £100 in gross fees, it would translate to around £70 as a net fee. Why? Because that £100 would have had tax and national insurance deducted before making it to your pocket.
It’s important to make sure that you’re comparing the same type of fees. Don’t be caught out by one provider that seems cheaper because it’s presenting its quote as a net fee.
Some umbrella companies are even more disingenuous with net fees. By using a higher tax band – like the additional rate of 45% – when working out net fees, they can make them appear even smaller. So, a gross fee of £100 would become less than £50 with 45% tax plus national insurance. The problem comes when you’re taxed at the basic rate of 20%, so the net fee become much bigger than quoted.
2. Percentage based fees
The majority of umbrella companies charge a fixed fee for their services. That fee, whether it’s weekly or monthly, will be the same for all their employees, unless someone signed up at a different price a few months or years earlier.
However, others will work on a percentage basis. Instead of taking £100 a month they will take 5% of your invoices, for example. This can make things a bit confusing when you’re comparing umbrella company costs.
They can easily mislead contractors too, by using a low total invoice to explain their costs. So, they might give the example of someone invoicing £1,000 a month, who would only pay £50 a month in fees. The reality is that you could earn a lot more than that in a month. Once you invoice above £2,000, you would be paying more than the typical fixed-fee cost for an umbrella company.
3. Entry and exit fees
One of the most common hidden costs with umbrella companies is the fee for joining and/or leaving. Put simply, they’ll ask for a one-off payment to cover the admin of adding you to or removing you from their systems. While it won’t affect the ongoing cost of your umbrella company, it will be an unnecessary and unexpected fee coming out of your pocket.
4. Added extras
Some umbrella companies will hide costs by breaking down the services they offer. Rather than including same day payments or the option to process expenses as standard, they will treat these as ‘added extras’, to minimise the basic fee they charge. However, if you need those services on a monthly basis, it’s inevitably going to increase the amount you’re paying.
5. Insurance
Similarly, some umbrellas will add a hidden cost for contractor insurance. This is particularly deceiving because umbrella company insurance policies typically cover all of their employees. It doesn’t cost them anything more to provide that insurance to you specifically, but they still want you to pay more for it.
6. Ambiguity
One of the simplest ways umbrella companies hide their costs is by withholding them altogether. They will talk about being cost-effective and affordable to entice you in. Once they’ve got your details, they can continually call and email you, persuading and pressuring you to use their services.
If an umbrella company doesn’t provide clear costs for their services, they’re not worth your time. Don’t submit details to companies just to get an idea of how much they charge.
