Are you running a Limited Company but don’t want the financial risk and ongoing administration hassle involved? Perhaps it’s time to consider joining an umbrella company.

In short, an umbrella company “employs” you as a contractor, taking care of your administration, payroll, taxes, and so on, allowing you to get on with your work without the hassle. Of course, the downside is that this convenience isn’t provided for free and will leave you making less than if you dealt with the behind-the-scenes stuff yourself. This article aims to provide a simple outline of what you can expect to pay, should you decide to join an umbrella company.

How much do umbrella companies charge?

Broadly speaking, umbrella companies will structure their charges in two ways; the first being a fixed fee, and the second a percentage fee.

Fixed fees are unchanging figures an umbrella company will charge you every week or month. For example, if you join a company with this type of fee, you might be expected to pay £20 a week, or £80 a month, depending on how they structure payments.

Percentage fees, however, are a percentage charge on your earnings. Generally, this fee has a ceiling, so you won’t have to pay past a certain threshold. However, this can still lead to a significant amount, particularly for high earners. As such, it would be best to look for umbrella companies that instead charge a fixed fee since it doesn’t make sense to pay more for earning more. After all, you haven’t increased their workload getting more money.

How do you pay an umbrella company?

Thankfully, using an umbrella company isn’t just substituting one set of admin work for another; payment is as simple as the umbrella company taking their fee from your earnings, as they deal with your client for you. The fee for this service is deducted from whatever the client paid, and that’s where it ends. What’s more is that this fee is taken before any tax is calculated, resulting in you recouping some of this charge by paying less in tax.

To give an example, let’s take an umbrella company that charges a fixed fee of £80 a month, and you earn £3000 in September. The company would take their fee before calculating tax, leaving a total of £2920 on which they would calculate your take-home pay. However, a percentage fee or even just 5% near doubles what you would pay, prompting a strong suggestion to check exactly what fees an umbrella company expects you to pay.

Are there any hidden costs?

Although an umbrella company will charge you for their services, it is not uncommon for them to charge extra for additional services or add catches requiring further payment. The most notable hidden costs are:

Signup and exit fees, which are what they say on the tin.

Admin is unrelated to your operations, such as insurance, expense processing, and producing your P60. As umbrella companies essentially employ you, they are legally required to have employer’s liability insurance. Often these companies will charge for this, and possibly other documents not exactly required by law, such as professional indemnity or public liability insurance before they enter into a contract with you.

Same day payment fees, which some umbrella companies will charge as a means to make an easy addition to their profits.

Generally speaking, umbrella companies that are anything but underhanded will not add in these hidden costs, but do be aware and always read the fine print before making your decision.

A good price doesn’t necessarily mean good service

It’s difficult to justify paying a high price for a service that offers convenience as its main selling point, but that doesn’t equate to cheaper being better either.

Given how often you will need to communicate with the umbrella company and how they handle your sensitive paperwork, a low price for a half-baked service could at best result in more stress and hassle than the convenience you are looking for, and at worst, end up with shoddy handling of the administrative side of your work. Remember, these companies exist to offer you a bit of support and make it easier for you to provide the service you want to provide. As such, it is worth considering whether a cheap umbrella company providing a cheap service will be able to offer you exactly what you need.

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