Thinking of contracting through an umbrella company but want to know what costs are involved before you commit? Then read on for Umbrella Options’ rundown on umbrella company costs and what they mean for your take home.
The most important question; what exactly do umbrella companies do in exchange for a slice of your earnings? Essentially, you will pay to be hired by the umbrella company as an employee. Which does admittedly sound counterintuitive but confers significant benefits.
The primary service of an umbrella company involves managing the administrative aspect of running your business. This consists of taking care of the payroll, taxes, invoice processing, and so on. Leaving you with more time to spend working on contracts and getting paid rather than fussing over the paperwork.
Secondly, the umbrella company will take what is required for tax from your contract pay. For example, Employer National Insurance, Employee’s National Insurance, or Income Tax. Because of this, what goes in your bank account is what you keep; no need to set aside any for HMRC or other expenses.
Umbrella companies will charge for their services via a fixed rate or a percentage rate, in addition to tax being deducted.
A fixed-rate is as simple as a one-time payment every week or month, typically costing around £25 or £100 respectively.
Conversely, percentage fees will take a slice of your earnings from every contract they process for you. While starting out, this method of payment might be ideal. However, you will quickly find the amount you pay ramping up as your business takes off, likely exceeding the price you would pay under a fixed fee.
If we take a percentage fee of 10%, for example, you would only need to earn £1000 a month to match the price you would pay under a fixed rate, with the fee rising as fast as your earnings. Usually, an umbrella company using this type of fee has a cap. It won’t increase forever, although this doesn’t mean much when you would always be paying more than a fixed fee anyway.
When using an umbrella company, the costs for their services are taken from your earnings immediately, as a fixed fee or a percentage depending on the payment structure, meaning you won’t have to worry about much admin here either. What’s even better is that these fees are taken before your tax, and national insurance is worked out. Which results in you recovering a bit of this cost by paying less tax.
Regarding umbrella company costs, it is important to consider if your fees include everything you need. The last thing anyone wants is to sign up to a contract that looks perfect at first glance. Only to be met with a mountain of extra costs that make it unaffordable. Here are a few things to look out for.
One of the more common additional charges is a single payment should you wish to leave. While, of course, acting as an incentive to stay with the company, it also pays for the admin of taking you off their systems. Similarly, you may be asked to pay a fee to join them, with the cost going to the admin required to put you on their books.
Although these seem relatively obvious, another common unexpected cost that many overlook comes as insurance. In addition to the insurance costs mentioned earlier, you might be expected to pay for public and employer’s liability insurance and professional indemnity cover. These are two of the most crucial forms of cover for contractors. While most umbrella companies package these costs as part of the deal, some will charge you for these should you want them.
Typically, umbrella companies are transparent about what you are getting for your money. Offering several packages at different price points to cater to a range of required services. However, it is essential to do your research, as some are much less clear than others.
An additional consideration is what you could potentially recover through umbrella company costs. While they can save you time and the headache of managing administration, umbrella companies also make it possible to claim certain tax expenses. That said, it should be noted that this has unfortunately been reduced over the past few years.
Before the Finance Bill 2016, it was possible to claim back non-chargeable expenses, such as transport, accommodation, equipment, and other similar costs. Since this bill, these costs are now considered commuting and general or day-to-day expenses.
This doesn’t mean umbrella companies can’t save you money anymore, however. While the above can no longer be claimed, they can still help you recover certain claimable expenses. Such as where clients pay for expenses agreed upon before the job, which can be claimed back through your umbrella company without being subject to tax.
Now you know what is involved in umbrella company costs and what to look for to avoid paying more than you are prepared to. It is important to choose one that suits you. After all, you will need to liaise with the company often, so having a friendly, helpful contact that is compatible with you and your business is a must to avoid any unnecessary stress. To find out whether Umbrella Options is the one to help you, click here.