We’ve heard reports that a leading umbrella has increased its basic weekly margin to almost £30. This is a considerable amount of money, and we wanted to share our views on what makes an umbrella company margin good value. With the UK’s economy as it is, we can all benefit from reducing our bills and cost of living, and perhaps moving umbrella companies could help you financially. Please keep reading for more information.
What is an umbrella company margin?
The only income that compliant umbrella companies generate is the margin they deduct (from gross) each time they process an employee’s payroll. Like all businesses, umbrella companies must generate revenue to survive (pay for business costs such as rent, staffing, payroll software, etc.). Therefore, if you are new to umbrella companies when requesting a take-home pay calculation, the umbrella company’s margin should be clearly stated on the document you are presented. The same applies if you’re issued with a Key Information Document (KID) via a recruitment agency – the margin should be clearly stated.
Recently, a few high-profile cases of umbrella companies failing to disclose the income they retain has hit the sector, and additional deductions or anomalies have appeared in employee payslips (an appalling practice). Our recommendation to ensure you receive the correct amount of pay transparently is to use an umbrella company with an accreditation from the Freelancer and Contractor Services Association (FCSA) or a Professional Passport.
Umbrella companies provide a valuable service
If you’re a temporary worker, umbrella companies are an excellent payroll solution to ensure you’re paid compliantly with HMRC’s rules and regulations (Pay As You Earn). There are also heaps of additional benefits available to you (but these may vary), including:
- Compliant and efficient payroll processing.
- Employee benefits, including Statutory Sick Pay and Maternity/Paternity Pay.
- Continuity of employment (which is often overlooked, but it can help contractors and freelancers secure financing and mortgages).
- Minimal administration.
- Free insurance cover, including Employers Liability Insurance, Public Liability Insurance and Professional Indemnity Insurance.
- Registering with an umbrella is easy, and despite the common belief that it is difficult to switch providers – it isn’t!
- You are not tied in to an umbrella and the umbrella company’s margin will only apply when you are paid by that umbrella.
- Employee reward schemes such as access to Perkbox.
What is a fair umbrella company margin?
Firstly, it’s worth pointing out that, like most purchases in life – you usually get what you pay for. Suppose a “compliant” umbrella offers a £7.50 per week margin. In that case, it is probably too good to be true, and the umbrella is possibly acting unethically (and could be a tax avoidance scheme) or providing a substandard service. However, this doesn’t mean you must pay over the odds for a reliable, professional and compliant umbrella company. Having heard that an umbrella is offering their services for almost a £30 per week margin, we wanted to step in and remind contractors and freelancers that this is nearly as high as it gets, and there are almost certainly better value providers out there who will offer a similar, or in some cases, better service.
Here are some tips to help you identify a compliant and excellent value umbrella company:
- Ensure the umbrella you use is based in the UK and process payroll in accordance with HMRC’s tax system – PAYE.
- Request a take home pay calculation before joining, and run through the figures carefully. Only use this umbrella if you agree the figures are legal and have been produced ethically.
- Check your payslips thoroughly, and do not hesitate to seek help if you believe unscrupulous activity is occurring. The FCSA has recently launched a new umbrella company payslip review initiative, allowing contractors and freelancers using any umbrella to request a free payslip review to ensure no malpractice has occurred.
- Determine what you need from an umbrella (other than compliance and the basics). If an umbrella includes plenty of extras you don’t need and the weekly margin is high – you know why. You might be better off finding an umbrella that offers payroll, compliance and the legal add-ons, and nothing else.
- Be careful when choosing an umbrella; some may only offer their margin for a few weeks before it increases. Ask whether the margin is likely to increase, and for peace of mind, get the response in writing. If the margin does rise without justification, don’t hesitate to move to another.
Why are some umbrella company margins so high?
Some umbrella companies have a high weekly margin because they are greedy – there is no other way to put it. The perceived stress of switching umbrella companies is often seen as a way for umbrellas to increase their margin – because they don’t think many employees will bother moving to save a few extra pounds each week. However, as we mentioned earlier, switching umbrella companies is easy, and for more information on the processes involved, please read our blog: Can you switch umbrella company when mid-contract?
A small selection of umbrellas offer extra services that others don’t – such as salary sacrifice for pensions. You may be interested in boosting a private pension pot when using an umbrella, and salary sacrifice could help. Umbrellas that offer salary sacrifice usually have an inflated weekly margin to cover the extra administration. Therefore, in this scenario, a higher margin may provide unbeatable value at the same time.
However, in such a competitive industry, plenty of umbrella companies are struggling to make ends meet. A high margin doesn’t necessarily mean the umbrella company is benefitting from high profits. It is now common for umbrella companies to offer recruitment professionals a “rebate” (sometime referred to as a referral reward) each time a contractor or freelancer is referred to them. So how do umbrella company rebates work? Here is an example:
If Lauren, a recruitment professional, refers James, an IT Contractor to Umbrella Company X, Umbrella Company X may agree to pay a rebate to Lauren every time they process the payroll for James. James has been quoted a weekly margin with Umbrella Company X of £20 in this scenario. However, the Umbrella Company X only technically receives £10 per week because Lauren, the recruiter, picks up £10 every time James is paid. Is this ethical? Probably not, because the contractor is technically the one who is suffering financially, and the recruiter (Lauren) earns substantial amounts on top of the initial commission (depending on agency policies) and salary. Is it the umbrella company’s fault? Assuming they offer a compliant service, we don’t believe so because the sector is competitive, and the margin was transparently explained at the very beginning.
Rebates are really concerning. Imagine one recruiter places 20 contractors in May 2023 with an umbrella company. Each worker uses the umbrella for 12 weeks, and the recruiter receives £10 per payslip that is processed. We’ll do the maths – the recruiter stands to pocket £2,400. Now imagine if this is just an average month for the recruiter and they do the same throughout the year – they could earn over £25,000 in rebates alone, not factoring in their salary or any additional commission.
We are not against the recruitment sector, and we appreciate the hard work and ethical mindset 99.9% of professionals in the industry have. However, it is worrying that recruiters are profiting well after a contractor has been placed, and they’re technically profiting at the contractor’s expense.
The leading recruitment agencies in the UK will have a carefully vetted Preferred Supplier List (PSL) – a list of umbrella companies that they recommend because they provide a compliant and efficient service. Therefore, while it’s important every temporary worker conducts due diligence before joining an umbrella, an agency’s PSL is usually a very helpful tool. However, it is worth understanding rebates, because an agency with a PSL could be benefiting from rebates if you selected an “approved umbrella” of theirs.
Seek an umbrella that provides you with value for money
Umbrella company margins typically vary between £10 and £30 per week. £30 per week does not necessarily mean you are getting a bad deal. For example, if the umbrella provides loads of extras that you can utilise, such as an employee reward scheme and salary sacrifice for pensions – you could be getting a wonderful deal. However, others are taking advantage of hard-working contractors and freelancers. Hopefully, this article will help you find a good value margin for your circumstances.
It’s important that you never feel pressured into registering with an umbrella company you don’t want to use, or you think is offering an inflated margin. Carry out thorough due diligence, and whatever happens, never be tempted to use a tax avoidance scheme!
Top 10 umbrella companies
If you’re looking for a new umbrella company, please visit our top 10 umbrella companies. They are accredited by the FCSA or Professional Passport, and some have special offers at the moment that you won’t want to miss!