Umbrella Company Costs – All You Need to Know

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It’s essential to understand Umbrella Company costs when choosing an umbrella company. Contractors should understand what they are paying for. Furthermore, they will want to know why they are paying it and how it might alter. Essentially, it’s money that is being deducted from the money you take home, so getting value-for-money is vital.

What Do You Pay the Costs for?

As contractors are hired as employees by umbrella companies, there is a cost associated with it. While it might seem odd, with it come a range of benefits.

Umbrella companies will handle tax and payroll at a cost while also managing and processing invoices, handling tax, and paying you your take-home pay. This provides contractors with a hands-off approach, enabling you to focus on your job.

Additionally, they will also deduct other costs associated with ta including Employer National Insurance, Employee’s National Insurance and Income Tax.

This means that the money you are paid is yours, and you won’t have to worry about putting money to one side for HMRC.

The Different costs

There are two types of costs associated with an umbrella company, and these are taxes and fees.

The fees are generally charged as a percentage or a fixed rate. With a fixed rate, you’ll be charged the same rate each week or month, and that average cost is around £100 per month.

In contrast, if it is a percentage, then they will take that percentage from every invoice they process. This can work out well during quiet periods and cost more during busy periods.

Along with this, you will need to pay taxes, which can include the likes of Employee National insurance and Income Tax on the gross billed amount after fees have been deducted. However, it is common for contractors to overlook that Employers National Insurance will also be deducted from the gross billed amount. This figure has to be contributed by employers who have to make on behalf of employees. When using an umbrella company, this will be taken from the contractor’s gross pay. The fee will not include this, but it will enable the companies to offer a lower processing fee.

When Should the Costs be Paid?

When it comes to umbrella company costs, the main benefit is that they are deducted before the income is processed. As a result, tax relief can be factored into the cost of umbrella company fees.

This means that if you earned £4,000 in a month, you would pay the introductory rate of tax, giving you a tax-free allowance of £1,042. Should you earn over this, you will have to pay 20% tax and 12% national insurance up to a total of £4,167 per month.

So, if you paid £100 as umbrella fees, it would be taken from the £4,000 earnings before taxation, which means you would then only pay tax on £3,900. The £100 would then become under £70 in your take-home pay once the tax has been deducted, which means that the umbrella company is costing less than the fee they have quoted.

Despite this, it is worth noting that some umbrella fees provide a quote that is a net fee, which is the figure once the tax has been deducted. If the quote is based on the higher rate tax band of 40% or the additional rate of 45%, you could find that you are paying more. One thing to consider is that it is worth opting for gross fees when you are looking at the fees that umbrella companies charge.

Umbrella Company Surprise Costs

One consideration you should make is whether the costs that they charge are inclusive of what you need. You don’t want to agree, only to discover that the fee is too high once they have included all of the extras.

To begin, certain umbrella companies will charge a fee should you choose to leave. While they might say that the fees are designed to cover the administration costs, it will also work as a way to keep you with them. Some might request a fee to join, and again, they will say that this is to cover the administration costs of adding you to the payroll.

Insurance is often one of the main culprits when it comes to unexpected costs. Most contractors will need public and employer’s liability insurance and professional indemnity cover, although most umbrella companies include these.

Recouping Costs Via Umbrella Companies

The other thing to think about is how much money an umbrella company can save. While they are sure to save time and effort associated with payroll and taxes, working through them will enable you to claim back tax associated with some expenses, but this has gone down in recent years.

Before April 2016, it was possible to submit a claim for taxation on non-chargeable expenses incurred while undertaking any contracting roles via the umbrella company. This would include:

  • 45p per mile up to 10,000 miles each year and 25p after that while driving
  • 24p per mile for motorcycle use, 20p per mile for bicycle use, and the costs associated with using public transport with a valid receipt or ticket.
  • Reasonable costs associated with accommodation, including breakfast and evening meals.
  • Any equipment that is considered essential but won’t cover suits will include branded uniforms and protective clothing.
  • Any training that has been completed and paid for that relates to a particular contract can have some of the costs reclaimed.

However, the Finance Bill 2016 brought in changes that placed restrictions on expenses and meant that contractors could only claim fewer things when operating via an intermediary such as an umbrella company. As a result, any subsistence costs or travel expenses would be considered commuting, and daily expenses would not be subject to tax relief.

Despite this, umbrella companies can help with claimable expenses in relation to clients that reimburse or subsidise pre-agreed expenses that relate to a specific job. It’s possible to claim these back from the clients free of tax via your umbrella company.

Understand the Full Costs

If you want to compare umbrella company fees and find the best deal, then Umbrella Options can help. Using our umbrella company calculator, you will be provided with bespoke quotes based on your income and your requirements. Provide your details, and you will be presented with a complete breakdown of costs and your take-home pay.

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