Umbrella Company Fees – What You Need to Know

Are you looking to improve your understanding of the costs associated with an umbrella company? Naturally, all contractors should understand the costs, the reasons for them, and how they might alter. Ultimately, it’s money that is being taken from your pay. Which means you want to make sure you are getting value for money.

Why do Umbrella Companies Charge For Their Services?

Umbrella companies employ contractors, ultimately making them employees, and that’s why they charge. Of course, being charged to be an employee might not make sense, but you will experience a range of benefits.

To begin, umbrella companies will manage the payroll and taxation process, and for this, they charge a fee. They will also manage invoices, take taxes and then process your take-home pay. All so you don’t have to handle the process. This allows you to take care of your contract without worrying about the administration commitments that come with being a contractor.

Along with this, Umbrella Companies will also deduct taxes from your gross pay, which can include the likes of:

● Employer National Insurance

● Income Tax

● Employee’s National Insurance

This means that the money you receive is all yours. It removes the need to put aside enough money to cover these. 

What Umbrella Company Fees Are There?

There are two main types of costs associated with an umbrella company: fees and taxes. The fees can either be fixed or based on a percentage. If the price is fixed, contractors will pay the same rate each week or month. On average, the cost is around £100 per month or £25 per week. In contrast to this, the percentage-based approach is adopted by some umbrella companies. They will take a percentage of every invoice they handle. When things are relatively quiet, this can prove to be a low cost for contractors. Once the work increases, they will make more money, which could be more than £100 per month.

The invoice processing costs are not the only costs associated with using an umbrella company, as more costs will be taken from your gross pay. You will be expected to pay taxes such as Employer National Insurance and income tax on the gross amount after fees have been deducted. Many who consider whether to become a contractor will often overlook the fact that Employers National Insurance is taken from the gross billed amount. This is a fee that employers have to make for each employee they have. It is something that they will commonly overlook. However, this fee is taken from the contractor’s gross pay because the umbrella fee will not cover it. What this means is that umbrella companies can reduce the fee that they charge for processing.

When Should Umbrella Company Fees be Paid?

One of the advantages that come with the costs of using an umbrella company is that they are dealt with before your payment is deducted from tax and national insurance. Therefore, you can include tax relief in the cost of the fees charged by your umbrella company.

If you earned £4,000 per month, you would be expected to pay the basic tax rate, giving you a tax-free personal allowance of £1,042. Whatever you earn beyond this will be susceptible to 20% tax and 12% national insurance up to a total of £4,167 per month.

If you were paying costs of around £100 for using an umbrella company, this would be taken from your monthly salary of £4,000 before tax. This will mean that you are then taxed on a total of £3,900. As a result, the £100 will become just under £70 after tax and National Insurance. This means that the fee is slightly less than the fee that they quote. 

It is worth being aware that some umbrella companies will provide a quote that is a net fee, which is the figure after tax has been deducted. Their quote could be based around the higher rate, which would be 40%, and it could be the additional rate of 45%, which means that you could be paying more. So, it makes sense to ensure you remain with gross fees when comparing umbrella companies’ fees.

Umbrella Company Fees That Could Be Unexpected

Another consideration to make is whether the costs involved will include everything you require. Therefore, you want to make sure that you find a contract that is affordable but also has all of the extras that you require.

Some umbrella companies will put a one-off fee in place should you choose to leave. The aim of this is to ensure that you remain with them. Some might ask for a payment to join. This will cover the administration associated with including you in the payroll.

However, insurance is one of the main contributors when it comes to unexpected costs. Most contractors will need both employer’s liability insurance and professional indemnity cover as these are essential. Many umbrella companies will include this. However, some will add this as an additional cost. Many umbrella companies will make this clear, providing a choice of packages at a range of prices that you can choose from, ensuring you have the right package to cover your needs. 

Costs That Can be Recovered Through Umbrella Companies

When it comes to umbrella company costs, one thing to think about is how much money they could help you save. While they will save you time and stress by taking care of taxes and payroll, using an umbrella company will enable you to claim back the tax on some expenses.

Before April 2016, it was possible to claim back tax on expenses that were non-chargeable and incurred during the contracting period via the umbrella company you use, and this includes the following:

● Vehicle use – 45p per mile up to 10,000 miles per year and 25p per mile after 10,000 miles

● Additional Transport – 24p per mile if using a motorcycle and 20p per mile for bicycle use. You could also claim for the use of public transport if you could produce a receipt as proof.

● Overnight stays and the reasonable costs associated with it. Including the price of breakfast and a meal during the evening.

●     Equipment: If items such as software, specialist clothing, or stationery are essential, this is covered. However, it won’t cover suits or branded uniforms.

●     Training: If training was completed and paid for, then some of the costs could be claimed, which is associated with a certain contract.

Despite this, the Finance Bill 2016 resulted in certain expenses being restricted when contractors worked through umbrella companies and other intermediaries. As a result, travel or subsistence costs would be considered standard commuting and expenses, so tax relief would not apply. However, umbrella companies can handle claimable expenses, so clients will reimburse or subsidise expenses that have been agreed upon beforehand that relate to a certain job. These costs can then be claimed from clients and will be free of tax via your umbrella company.

Obtain A Full Understanding Of Fees

If you are looking to compare the costs associated with umbrella companies, then umbrella options can help. Using our umbrella company calculator will provide a range of quotes determined by your requirements and income.