Umbrella Company Fees Guide For UK Contractors

Whether you are a first-timer or a seasoned contractor, it is essential to understand the costs involved when engaging with an umbrella company. Understanding the fee structures helps in managing earnings more effectively.

In this guide, we are going to discuss in detail the various fees charged by umbrella companies, how they impact your take-home pay, and what to consider when choosing the right umbrella company to manage your contracting needs.

Umbrella companies make contracting easier by taking care of a contractor's administrative duties, such as handling payroll, taxes, and compliance. However, these services come at a cost, known as umbrella company fees.

Why Do Umbrella Companies Charge Fees?

An umbrella company is a company that acts as an employer to contractors who work under temporary contracts, typically through recruitment agencies.

Their main role is to process invoices, deduct the necessary taxes and National Insurance contributions, and ensure that contractors receive their salary correctly. In return, they charge a fee to cover:

• Payroll processing and compliance with HMRC regulations.
• Deducting and paying Income Tax and National Insurance via PAYE.
• Providing legal and HR support.
• Offering insurance cover such as professional indemnity, public liability, and employer’s liability insurance.
• Covering operational costs such as staffing, software, and banking fees.

Understanding these fees is crucial to ensuring you’re not overpaying for services that should be standard.

What type of fees does an umbrella company charge?

Umbrella companies typically charge a fee (also known as umbrella margin) in return for processing your payroll, providing administrative services, and ensuring compliance with HMRC. Let’s look at the main fees involved:

Fixed Weekly or Monthly Fees

This is the most common fee structure, where the umbrella company charges a flat rate regardless of your earnings.

Most umbrella companies charge either a weekly or monthly fee for their services. These fees range from £15 to £35 per week or £60 to £150 per month, depending on the company and the level of service provided. Ideal for high earners as the cost remains constant, rather than increasing with income.

Percentage-Based Fees

Some umbrella companies charge a percentage of your earnings instead of a fixed fee.

• Typically ranges from 2% to 6% of your income.
• This means that the more you earn, the more you pay in fees.
• Can be expensive for high earners, making fixed-fee structures a better option.
• Often marketed as ‘fair’ since it scales with income, but in reality, it can lead to excessive deductions.

Hidden and Additional Fees

It’s essential to check for hidden charges, as some umbrella companies impose additional costs. These may include:

Additional Admin or Setup Fees

Some umbrella companies charge one-off setup fees when you first register with them. While many umbrella companies include setup as part of their standard service, others may charge between £50 and £100 to cover administrative costs associated with getting you set up on their system.

Exit Fees

If you decide to switch to another umbrella company or form your own limited company, certain umbrella companies may charge an exit fee, typically ranging from £50 to £100. Not all umbrella companies charge this, so it’s important to check their terms before signing up.

Holiday Pay Handling Fees

Some umbrella companies offer to manage holiday pay on your behalf, while others may charge for this service. Holiday pay is accrued at 12.07% of your gross pay, but handling fees could reduce the amount you take home if the company charges extra for administering this.

Insurance Premiums

Umbrella companies are required to provide certain types of insurance (such as employer's liability and public liability), which is usually included in their fee. However, for those working in high-risk industries, additional premiums might apply. Some umbrella companies may offer these insurances as add-ons, which could increase your costs.

Optional Benefits Fees

Many umbrella companies offer additional benefits such as pension contributions, private healthcare, and expense claims management. These extras can come at an additional cost, so it’s important to assess whether the benefits are worth the added expense.

Issues with Umbrella Take-Home Pay Calculators

Many umbrella companies use take-home pay calculators on their websites to attract contractors. These calculators claim to show how much you’ll receive after tax and deductions, but they often:

• Overestimate take-home pay – Some include unrealistic expense allowances.
• Ignore additional deductions – Some calculators don’t account for employer’s National Insurance (NI) and the Apprenticeship Levy.
• Promote tax avoidance schemes – If a company claims you can retain 80-90% of your pay, it’s likely operating a disguised remuneration scheme. HMRC has strict rules against this, and contractors using these schemes could face large tax bills in the future.

To get an accurate take-home estimate, always request a detailed breakdown from the umbrella company, including all deductions and employer costs.

How Much Do Umbrella Company Fees Cost in Total?

The overall cost depends on how often you're paid and the type of fees charged. Here’s a rough estimate: