If you are in the middle of choosing a new umbrella company, you are probably trying to identify a cheap umbrella company to ensure you maximise your pay retention. However, there are a lot of factors to consider when determining whether a cheap umbrella company is worth engaging with. This article will summarise them all to help you pick an umbrella company that provides excellent value for money. A cheap umbrella may not be your best option – as we explain.
What makes a cheap umbrella company?
We’ve written the following statement several times throughout the umbrellacompanies.org.uk website. Still, it’s essential – The only income umbrella companies generate for themselves is the margin they deduct from each employee’s gross pay when processing their payroll (assuming they’re compliant).
With the above in mind – an umbrella company with a lower margin (e.g. £15 per week) is “cheaper” than an umbrella with a higher margin (e.g. £25 per week). By choosing an umbrella with a lower margin, you will retain slightly more of your money each payment frequency, but not necessarily as much as you might think.
Most umbrella companies will quote you the gross margin. The gross margin is the total margin before deductions are made to your pay. Because it’s taken before any deductions, you benefit from a tax saving. Some sneaky umbrellas are quoting contractors and freelancers the net margin – the amount after tax. This tactic can be misleading because a net margin will always be lower than a gross margin. It can also hide the fact that the umbrella is retaining a higher amount. For example, if you’re quoted a net margin of £12.00, the umbrella will retain more because the gross margin is higher (for example, £15.00 – or thereabouts). Don’t be fooled by misleading umbrella companies trying to trick you – always ask for the gross margin for comparison purposes.
An umbrella company with a lower gross margin than the competition will help you retain more of your money. Therefore, it’s reasonable to refer to an umbrella with a £15 per week margin as “cheap” compared to one with a £30 per week margin. However, the umbrella company’s margin isn’t everything, and there are many additional factors you need to consider when choosing an umbrella company. Take it from us – a cheap umbrella company certainly doesn’t make it the best.
How cheap can cheap umbrella companies be?
Umbrella company margins typically vary between £15 to £35 per week, or £60 to £140 per month. However, every now and then, you may see umbrellas offering lower margins than £15 per week (or £60 per month). If the umbrellas doing this are compliant with HMRC – then great! But this isn’t always the case. Umbrellas deduct a margin to cover their costs, including administration, staffing, etc. Therefore, if an umbrella had a margin of £0 – it wouldn’t make any money and would go bankrupt immediately! Keep reading to discover more.
There is far more to consider than just the umbrella company’s margin.
Picking the cheapest umbrella you can find will probably help you earn a few extra pounds each payday. However, what is the point in saving a tiny bit of money if the service you receive is completely inept?
Please take the following into account when you choose your next umbrella company.
Margin
Yes, always consider the margin because some umbrella companies are significantly more “expensive” than others. An article that will help explain this in more detail is: £30 A Week For An Umbrella Company Margin? No Thanks!
Compliance
It’s imperative you only consider using compliant umbrella companies. Sadly, there are many tax avoidance schemes targeting contractors and freelancers. In many cases, these evil companies pretend they’re legitimate and that there will be no consequences should you engage with them. In reality, this is nonsense and using a tax avoidance scheme for your payroll could have devastating consequences – as we explain later in this blog post. All compliant umbrella companies use HMRC’s Pay As You Earn (PAYE) tax system. If you come across a company offering to pay you differently, avoid them at all costs.
Take-home pay calculations
Disappointedly, it’s common knowledge that some umbrella companies deliberately inflate the pay calculations they give to prospectus contractors and freelancers, but why? The answer is very straightforward – trick people into registering with them rather than a competitor. For example, imagine a worker who is entirely new to umbrella companies. They have just been handed a Preferred Supplier List (PSL) from an agency (a list of agency-approved umbrella companies from which the worker can choose). One umbrella quotes a far higher pay retention rate than the rest. Therefore, the worker decides to pick them rather than the other umbrellas. Was this the right choice? Almost certainly not.
All compliant umbrella companies process payroll in the same way – they abide by Pay As You Earn (PAYE) – HMRC’s tax system. Therefore, if every compliant umbrella company has the same margin, they would all pay you the same amount to the penny. Therefore, if one umbrella is quoting far higher pay retention than the rest, they are probably trying to trick you.
Umbrella companies can create misleading calculations in many ways. For example, they can use the wrong tax code, incorrectly assume you’ll take no time off over the year, fail to make the correct tax and National Insurance deductions, and exclude the £100,000 abatement (should it apply). When you request a take-home pay calculation from the umbrella, be sure they have considered your exact circumstances.
You can request a calculation from a compliant umbrella company here.
Customer service and reviews
Paying an excessive margin is something every contractor and freelancer will want to avoid. However, is it really worth picking the cheapest umbrella company if their service is garbage? No!
You need to conduct research into umbrellas you’re considering using and gauge what their customer service is like. Look at online reviews and see what other contractors and freelancers say. Just because an umbrella has a low margin doesn’t mean they’ll process your payments on time or pick the phone up when you ring in with a question.
Customer service is important – not just during the sign-up process. Registering with an umbrella company is fairly straightforward, but a lot of information needs to be exchanged. It’s important you choose an umbrella with a streamlined registration process and one that provides continued support. We’ve noticed that many umbrellas (the better ones) have special “onboarding” procedures to help new employees throughout the registration process and up to the point of receiving their first payment and payslip. It’s a good idea to speak with an umbrella before joining them to gauge what kind of ongoing service levels they provide.
Another essential piece of advice – check out the website of any umbrella you’re interested in. Is it up to date, and does it include thorough and factual information? Believe it or not, some umbrella companies have very old-fashioned and bare websites that don’t represent the business in a positive light.
Insurance
Umbrella companies need to provide some insurance by law. However, others include additional insurance to encourage people to register with them (by providing added value). Before choosing an umbrella, make sure you know what insurance is included. We can’t be certain, but the cheapest umbrella company you find will probably not offer the most comprehensive insurance options.
Contract of Employment and Employee Benefits
When registering with an umbrella company, you must sign and return a Contract of Employment. You must read this to ensure that you’re happy with its content and that you will receive the correct, legal Employee Benefits (such as Statutory Sick Pay). Cheaper umbrella companies might not have high-quality and well-written Contracts of Employment – be careful.
Added extras
Many umbrella companies will offer little extras to entice contractors and freelancers to register with them. For example, employee discount schemes (such as Perkbox), Same Day Faster Payments, access to a state-of-the-art portal and app, salary sacrifice (if you’re interested), and more. If you like getting more for your money, shop around and see what’s available.
Reputation
An umbrella company’s reputation means a great deal to it. Don’t just look at online reviews; see what other workers say on contractor forums. Ask your friends and family if they have ever used an umbrella company before and what their experiences were. Is the umbrella you’re interested in using a member of Professional Passport or the FCSA – two well-respected self-regulatory industry bodies? Do members of the umbrella staff write content for well-read and trustworthy sources of industry news? Again, this may not apply in all cases, but the cheapest umbrella companies will probably have poorer reputations, but you must carry out due diligence.
Is a cheap umbrella company the best option for contractors and freelancers?
We’ve answered this already (above), and we’ll answer it again later. However, if you’ve seen this heading and wanted to see the “short” answer, here it is – no! The cheapest umbrella isn’t necessarily the best option for several reasons. We recommend you read the full article to understand more.
Only engage with compliant umbrella companies and make sure you avoid tax avoidance schemes
Forget whether an umbrella is cheap – your priority should be choosing an umbrella company that is compliant and operates PAYE. Tax avoidance schemes are targeting vulnerable contractors and freelancers, and engaging with one (even by mistake) could have devastating consequences.
With over 500 umbrella companies in the UK, picking a compliant umbrella company isn’t as easy as it should be. However, here is some helpful advice. Two self-regulatory bodies in the UK focus on ensuring the supply chain of temporary workers is compliant with UK tax law and operate ethically. These are Professional Passport and the Freelancer and Contractor Services Association (FCSA).
Umbrella companies can become members of both of these bodies and earn accreditation to show off to potential employees. However, having accreditation from Professional Passport or the FCSA is far more than just showing off a crest on the umbrella’s website. Umbrella companies must undergo a series of strenuous audits and assessments and prove they operate compliantly and in the very best interests of their employees. Only then will it be given a professional accreditation. And both Professional Passport and the FCSA demand that umbrellas undergo an annual audit. Umbrellas can’t become a member and then start slacking. Instead, they must prove yearly that they remain compliant and have adapted to legislative changes.
Before considering an umbrella company’s margin, only look at umbrellas with a Professional Passport or FCSA accreditation. You will then be picking an umbrella that’s proven its compliance. From this selection of payroll providers – feel free to identify the cheapest umbrella company – but consider the rest of this article too.
The dangers of being paid through a tax avoidance scheme
If you are paid through a tax avoidance scheme and get caught by HMRC, you could find yourself in serious trouble. Not only could you face a huge bill of tax and National Insurance that you’re deemed to owe, but you could also be further penalised with fines. The implications of using a tax avoidance scheme could be life-changing.
Common warning signs of a tax avoidance scheme
There are some rather telltale signs of a tax avoidance scheme. Please consider the following points. Most tax avoidance schemes:
- Promote higher pay retention – sometimes above 90%.
- Will not operate PAYE. Instead, they may offer you an unusual method of being paid, perhaps through loans, credits or shares.
- Are located outside of the UK. This should instantly set off alarm bells because if you’re working on assignments in the UK, it makes sense to assume your payroll provider should also be based there too!
- Claim they are “HMRC compliant” or “approved by HMRC”. HMRC does not promote any umbrella companies or provide “approval”.
- Have been set up by people without much trading history. In a recent case, mini umbrella company fraud, hundreds of umbrellas were created by criminals in what appeared to be days, and the directors of each company had little to no trading history. Always check an umbrella is well-established in the marketplace before joining.
- Will ask you to sign multiple contracts – sometimes with third-parties you’ve never heard of before.
- Have a very small website – sometimes with just one form and minimal contact details.
HMRC has recently started naming and shaming tax avoidance schemes, so always check the official government’s website if you have any concerns about a payroll provider.
Conclusion
The famous saying goes – “you get what you pay for”. In many cases, this applies to choosing an umbrella company, and the cheapest umbrella company isn’t the best.
Your number one priority should always be compliance, and we recommend you pick an umbrella with a Professional Passport or FCSA accreditation. We’ve created an umbrella company directory consisting exclusively of these umbrellas, and it’s worth having a look.
The only difference between compliant umbrella companies is the margin they deduct. Therefore, you can save some money by using an umbrella with a £15 per week margin compared to one with a £30 per week margin. However, for the sake of a few quid, you may well be better off choosing an accredited umbrella with a long trading history and excellent reputation within the industry.
Always conduct thorough due diligence.
Top 10 umbrella companies
There are so many umbrella companies to choose from, and picking the right one is extremely difficult! We’ve collated a list of our top 10 umbrella companies to make your life easier. They are all accredited by the FCSA or Professional Passport, and some have special offers at the moment.
Remember – choosing a compliant umbrella company should always be your priority. Only once you’ve identified a compliant umbrella company should you consider the margin. If you want an umbrella with a low margin, shop around. Our umbrella company directory may help you with your search.
