Umbrella Company Costs: The Facts

On a purely financial basis, it’s probably worth becoming a limited company contractor if you earn more than £200 per day (source: Umbrella Supermarket). But that decision ignores the fact that using an umbrella company will free up your spare time and ultimately that free time might be worth more to you than a few extra pounds in your pocket.

 

Yes a limited company is more effective the more you earn, but with greater financial freedom comes extra responsibilities. These include but are not limited to more paperwork for HMRC, the requirement to file at Companies House, time spent invoicing and chasing payments, additional IR35 scrutiny, and more.

However, if you’re earning less than £44,000 a year as a contractor (that’s still more than 50% higher than the national average wage) or you don’t want the additional burden of significantly greater administration, working with an umbrella company is probably the better choice.

There are hundreds of umbrella companies to choose from, some specialist and some run as separate divisions within accounting firms. When selecting an umbrella, what should you look out for?

Ongoing flat fee

 In the past, umbrella companies have tried to compete with each other by promising that their contractors could take home ever higher percentages of the fees they’d earned from the client. For nearly 20 years, schemes that were more and more opaque were devised as artificial constructs allowing contractors to pay next to nothing in taxes and National Insurance. Of course, whatever savings they were allegedly making were swallowed up by big ongoing fees by their umbrella companies.

If something looks too good to be true, then it probably is. And in the cases of the poor contractors who were unknowingly duped or had their arms twisted into joining these schemes, it was too good to be true. They used schemes like “employee benefit trusts” which, because of an Act of Parliament passed in 2017, unfortunately came back to haunt them – click here to read more about the “Loan Charge”.

The rules surrounding how much tax and National Insurance you have to pay are enshrined in law. Legitimate and trustworthy umbrella companies do not compete on promising to find ways to ensure you pay less tax – they only compete on the fees they charge, one of which is the ongoing flat fee.

The flat fee is charged weekly or monthly and it’s a standing charge for using the umbrella company’s service. The flat fee is normally fixed. Be careful because some umbrellas quote their net fees – what their service costs you after tax relief has been applied to your income. Tax relief may be at 20%, 40%, or 45% so direct comparisons between umbrella companies can be complicated if quoted net. Always ask, where possible, for gross figures.

 

A percentage of the value of your invoiceable work

In recent years, the market has moved over much more to a fixed flat fee charging system and away from charging a percentage of the value of your invoices. Those umbrella companies who do charge a percentage of the value of your invoices often have caps on the maximum they’ll take every month however many don’t.

If you choose a company which does not offer a cap, the amount you pay them for what are essentially identical services to fixed flat fee providers may be much higher. Please consider this as an urgent wealth warning for contractors who are particularly high earners – please do your sums and get quotes before committing to any provider.

 

Other charges to watch out for

 There are often a number of other charges you have to watch out for including:

  • exit or leaving fees
  • insurance
  • additional administration
  • making same-day payments
  • signing up fees

 

Don’t always take what they say for granted from the start

Some umbrella companies also promote their services in tandem with their tax solution services – in essence, they’re promising to use their skills in accounting to make sure that you pay as little tax as possible. However, as ContractorCalculator warns, some tax solution providers do so using “a form of trust or offshore tax treaty.” The risks are higher when you use this type of company because tax law evolves on a continuing basis and, as we’ve seen with the Loan Charge, HMRC and the government can change their mind about an arrangement whenever they want. Then, they chase you retrospectively for allegedly-owed tax even though they had previously waived your tax return through. Never mess around with the HMRC – a subject we’ve covered before here on Umbrella Supermarket.

There is a high likelihood that you will come into contact via your work with other contractors. They are a great source of information about umbrella firms, how they treat their contractors, and how much they charge their contractors for their services. It’s always worth asking around for recommendations before making any commitment.

What to expect on your payslip?

You are trusting your umbrella company to deal with your tax affairs promptly and accurately as well as safeguarding your employment rights. If HMRC wants to investigate you, it will be the umbrella company’s records of your activity that they inspect so they have to be correct every time.

Make sure that, on your payslip, that your expenses are shown clearly as are other fees and margins deducted from you. Be clear with your umbrella company about your expenses, who’s reporting them, and how they’re classified for taxation purposes.

You should expect to see your statutory pay on your payslip together with commission payments, holiday pay, and your expenses.

Find the best umbrella company straight away

We all know accountants aren’t exactly quick off the mark a lot of the time. Not so with the umbrella companies that we work with here at Umbrella Supermarket.

Our service is simple and straightforward. Get a live quote in under two minutes using our online “umbrella engine” and we’ll come back to you virtually instantly with four great options based upon the preferences you give us. We’ll provide you with detailed rundowns of each of the options and how they’re best placed to achieve the outcomes you want. Then, all you need to do is to request a more detailed illustration from the umbrella company of your choice.

To start, please click here.

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