Want to know more about umbrella company costs? Of course you do! It’s important for all contractors to know what they’re paying, why they’re paying it and how it could change. After all, it’s money that’s coming out of your take home pay – so you want to make sure you’re getting great value in return.
What are umbrella company costs for?
Umbrella companies charge contractors to hire them as employees. Charged to be employed? Yes, but it has a range of benefits.
Firstly, umbrella companies take care of payroll and taxation in return for a fee. They process your invoices, deduct your taxes and send your take home pay on a weekly or monthly basis so you don’t have to. That means you can fulfill your contract with the minimum of hassle.
Secondly, Umbrella Companies will deduct taxation “costs” from your gross pay such as:
- Employer National Insurance
- Employee’s National Insurance
- Income Tax
This means that the funds you receive into your bank account are yours to spend and you don’t need to put any to one side for HRMC.
Types of umbrella company costs
Umbrella company costs break down into two main types – fees and taxes.
Umbrella Company fees can be percentage-based or via a fixed rate. As the name suggests, fixed rate costs charge contractors a fixed fee every week or month for their services. This is generally around £100 monthly or £25 weekly.
On the flipside, some umbrellas take a percentage of every invoice they process for you. On a quiet month, this could work out better for you. When things pick up, however, you’ll find umbrella companies taking a bigger slice of the pie before you get your take home pay, which could amount to more than £100 a month.
As an example, if they took 5% of your invoiced income, you would only have to earn £2,000 in a month to pay more than £100 in umbrella company costs.
Umbrella company processing costs aren’t the only things that will be deducted from your gross pay.
As a contractor, you will expect to pay taxes like Employee National Insurance and income tax on your gross billed amount less fees. However it’s often overlooked by those considering whether to become a contractor that the Employers National Insurance (ENI) will also be deducted from the gross billed amount.
This is a contribution that employers have to make on behalf of every employee and often goes unseen.
Through umbrella companies, ENI is deducted from the contractor’s gross pay as the Umbrella fee will not cover it. This allows umbrella companies to minimise the processing fee they charge.
When do you pay umbrella company costs?
One of the benefits of umbrella company costs is that they’re taken before your income is processed for tax and national insurance. As a result, you can factor in tax relief to the actual cost of the umbrella company fees.
Let’s say you earn £4,000 in a month. This would put you on the basic rate of tax, with £1,042 of tax-free personal allowance. Anything earned above this amount is subject to 20% of tax and 12% of national insurance – up to £4,167 per month.
£100 in umbrella company costs would be deducted from your £4,000 before taxation, leaving you with £3,900 to be taxed. This £100 would have become less than £70 in take home pay after 20% tax and 12% national insurance, so your umbrella company is actually costing you a bit less than the gross fee they quote.
Beware, however, as some umbrella companies will quote as a net fee – the figure after tax. If their quote is based on the higher rate (40%) or even additional rate (45%) of tax, you may find yourself paying a bit more. Put simply, it’s best to stick to gross fees when you’re comparing umbrella company fees.
Unexpected costs with umbrella companies
The next consideration is whether your umbrella company costs include everything you need. Nobody wants to sign up to a contract only to find that it’s unaffordable with the ‘added extras’ they need.
Firstly, some umbrella companies will charge you a one-off fee if you want to leave. As well as covering the admin of removing you from their systems, this is probably a way of encouraging you to stay on. Others may even ask you to pay to join them, generally to cover the administration of adding you to the payroll.
However, some of the more common unexpected costs come through insurance. Public and employer’s liability insurance and professional indemnity cover are essential for most contractors. They are thrown in as part of the deal by many umbrella companies. Unfortunately, you’ll find that other providers add to the cost if you want insurance.
Some umbrella companies are clear about this, offering multiple packages and prices to choose from depending on what level of service you need.
Recovering costs through umbrella companies
Another key consideration when it comes to umbrella company costs is how much money they could save you. Alongside the saving of time and effort through processing payroll and taxes, working through an umbrella company allows you to claim back tax on certain expenses – although this has been reduced in recent years.
Prior to April 2016, you could claim back taxation on non-chargeable expenses that were incurred during your contracting roles through your umbrella company, including:
- Driving – 45p per mile for up to 10,000 miles a year and 25p a mile for anything after that.
- Other transport – 24p per mile on motorcycle, 20p per mile on bicycle and the cost of any public transport journeys as long as you had the receipt or tickets.
- Accommodation – Any ‘reasonable’ costs for overnight stays along with the cost of breakfast and evening meals.
- Equipment – Stationery, software or specialist clothes, if they’re essential to the work you’re carrying out. No, that doesn’t include suits – but does cover protective clothing and branded uniforms.
- Training – If you completed (and paid for) training, directly related to a particular contract, you may have been able to claim back some of the costs.
Unfortunately, the Finance Bill 2016 restricted the expenses contractors could claim when working through an intermediary – including umbrella companies. Essentially, any travel or subsistence costs would be treated as ordinary commuting and day-to-day expenses – which would not be subject to tax relief.
However, umbrella companies can assist with claimable expenses, where clients reimburse or subsidise pre-agreed expenses relating to a specific job. These can be claimed back from clients free of taxation through your umbrella company.
