Umbrella company costs can often be an area of confusion for contractors and freelancers. Therefore, to explain how umbrella costs work and what an umbrella company margin is, we’ve created a short video entitled – how much does it cost to use an umbrella company? Please scroll down to watch the YouTube-hosted video or to read the transcript.
Video transcript – how much does it cost to use an umbrella company?
Provided you are using a compliant umbrella company, the only deduction from your pay that the umbrella company will retain is the weekly or monthly margin. The margin is retained to cover the operational costs of umbrella companies. The other deductions made to your pay are tax deductions paid to HMRC on your behalf.
There are two types of umbrella company margins, although one is much more popular than the other. The first type is a fixed margin, umbrella companies’ most commonly used margin. Fixed margins are as the name suggests – you will be charged the same amount each time you are paid, whether weekly, fortnightly or monthly. For example, an umbrella company could charge a weekly margin of £20 and the umbrella company will deduct £20 each time you are paid.
The other margin that is a lot less frequently used by umbrella companies is percentage margins. The umbrella company will deduct a percentage of the worker’s gross assignment rate. For example, if you agree to a one percent company margin and your assignment rate is £1,000 per week, the margin the umbrella company retains is £10 per week. If you are a higher earner, a percentage margin could cost you a lot of money.
Another area that causes a lot of confusion is the difference between a gross and net umbrella company margin. Most umbrella companies will use the gross margin amount when they provide you with a take-home pay illustration. The gross margin is the amount the umbrella company will retain before deductions are made to your pay. Umbrella companies do it this way as it is more tax-efficient for the contractor.
However, some umbrella companies will quote the net margin in their illustrations to make it look like they offer the service at a much better rate. However, the net margin is the amount it’ll cost you after tax. While it may appear that you are getting a better deal, the gross margin will be a lot more.
An easy way to remember the difference is that the gross margin is the amount taken before tax is deducted, meaning it is more tax efficient and will cost you less. The net margin is the amount deducted from your net salary (your take-home pay).
Please visit the new Umbrella Companies YouTube Channel
The new Umbrella Companies YouTube Channel has over a dozen videos covering an array of questions about umbrella companies. Please check it out now!
Top 10 umbrella companies
On the lookout for a reliable, trustworthy and compliant umbrella company? If you are, you’ve come to the right place. We have put together a list of our top 10 umbrella companies. They are all accredited by the Freelancer and Contractor Services Association (FCSA) or Professional Passport. Please check them out – some have special offers at the moment!