Umbrella company margins – a guide for contractors

Umbrella company margins – a guide for contractors

Umbrella company margins are frequently debated by contractors, freelancers and temporary workers. What is a reasonable umbrella company margin? How come some umbrella margins are so low while others are so high? Why are umbrella company margins usually higher when you’re working through a recruitment agency? What is the difference between a gross umbrella company margin and a net umbrella company margin? We’ve tried to tackle the most common questions regarding umbrella company margins and have answered them below. If you have a question about umbrella company margins, please comment at the end of this guide, and we’ll do our best to answer them as soon as possible (posting replies below).

What is an umbrella company margin?

The umbrella company margin is the amount the umbrella company retains from invoices raised on your behalf. For example, if you become an employee of an umbrella company with a £15 per week margin, you will see a £15 deduction on your weekly payslip. If you’re paid fortnightly, expect the weekly margin to be doubled. And, if you’re paid monthly, margins are usually multiplied by 4.5.

Umbrella company margins only apply when you’re paid. Therefore, if you are in between contracts but remain on an umbrella company’s books – the umbrella company will not subject you to any costs. Margins are only deducted when an umbrella process your payroll.

The only income that umbrella companies generate for themselves is the margin they deduct. This covers administration, business costs etc. Every other deduction that’ll appear on your payslip is sent to HMRC on your behalf (or to your pension provider if you decide to remain opted into pension contributions through your umbrella company).

Types of umbrella company margin

There are two types of umbrella company margins, although one is far more common than the other. We summarise both below.

Fixed umbrella company margins (most common)

Fixed umbrella company margins, as the name suggests, are definitive and apply to each payment frequency. Most temporary workers are paid weekly, fortnightly, or monthly.

Percentage umbrella company margins (rare)

Percentage umbrella company margins are pretty rare nowadays. They work by the umbrella company deducting a percentage of the worker’s gross assignment rate. For example, if you agree to a one percent umbrella company margin and your assignment rate is £1,000 per week, the margin that the umbrella retains will be £10 per week. Percentage umbrella company margins could end up costing you a fortune depending on the agreed rate or your rate of pay. Therefore, we recommend you only consider using an umbrella with a fixed margin.

What is a realistic umbrella company margin?

It’s in your interest to choose an umbrella company with a competitive margin, but also one that provides the level of service that’ll ensure you’re paid complaint, on time and without complication.

Most umbrella companies advertise a weekly margin between £15 and £25 per week. If you find a weekly margin under £15 – we’d say that’s very low cost. On the other hand, any weekly margin that exceeds £25 is expensive (unless additional extras are included that are valuable to you).

Why do some umbrella companies have noticeably lower margins than others?

As the old saying goes – you get what you pay for. This is often the case with umbrella companies – but there are some exceptions.

As we explain later in the guide, some umbrella companies will have a high margin because they pay recruitment agencies incentives. However, an umbrella company’s margin can depend on several factors, including extras available to employees, company size, overheads, size, accreditation, staff, and more.

To assess whether the umbrella company you’re considering using will provide you with value for money, it’s worth looking at the extras you can benefit from. After all, umbrella companies provide more than just a payroll service. Added extras can include:

  • Insurance cover, including Professional Indemnity, Public Liability and Employer’s Liability.
  • Same Day Faster Payments
  • Employee discount schemes
  • Access to an online portal

Choosing the umbrella company with the lowest margin isn’t always the best way to source a payroll provider. You may benefit from taking home a few extra pounds each month, but overall, you may suffer from a lack of customer service and risk engaging with a non-compliant provider.

Whichever umbrella company you choose, we recommend you only consider using one that has FCSA or Professional Passport accreditation. These are the two most respected professional bodies dedicated to ensuring the supply chain of temporary workers is compliant with HMRC’s rules and regulations. By choosing a provider that’s accredited by one of these bodies, you’re picking a business that’s proven its compliance by passing a series of strict audits and assessments. You’ll be in the safest hands.

Why are umbrella company margins frequently higher when accepting a role through a recruitment agency?

The sad reality is that many recruitment agencies (not all of them) will profit when they refer a temporary worker to an umbrella company.

It’s common for recruitment agencies to recommend the services of an umbrella company to temporary workers who may require one. Once the agency has contacted the umbrella and made them aware that a worker is interested in their payroll service, the umbrella company will reach out to the worker and provide them with a take-home pay calculation. In this calculation, the umbrella will include its margin. So far, so good.

However, we want to show how some recruitment agencies are profiting at the expense of the workers it places. Most commonly, there are two ways that recruitment agencies profit from placing temporary workers through an umbrella company.

We must reiterate that not every recruitment agency looks to financially benefit by referring contractors, freelancers and temporary workers to umbrella companies.

Example 1 – Recruitment agency doesn’t profit

In many cases, ethical recruitment agencies will suggest to their temporary workers that they use a compliant umbrella company on the agency’s preferred supplier list. The worker is free to make their own decision about which umbrella they register with and they liaise with the umbrella company themselves.

Example 2 – Upfront payment transferred to recruitment agency

Some umbrella companies will pay a recruitment agency a lump sum when a temporary worker is referred to their service. Usually, the agency will eligible for the lump sum once the worker has been paid a specific number of times by the umbrella company (often 8 to 12 weeks).

Example 3 – Rebate structure in place to reward recruitment agency

Rebates (sometimes called “ongoing incentives” and “kickbacks”) apply every time an umbrella company pays a referred worker. The umbrella company will know the minimum gross margin they can quote to remain profitable. In this example, let’s say it’s £10.00 per week.

However, because the recruitment agency wants a reward for referring the worker, the umbrella will quote the temporary worker an inflated margin – let’s say £25 per week. Every week the worker is paid by the umbrella, they will be subjected to a £25 gross margin. From this £25 per week margin, £10 will go to the umbrella company, and £15 will be paid back to the recruitment agency (by the umbrella company) as a thank you – often referred to as a “rebate”. The rebate agreement is ongoing and can earn agencies substantial revenue.

Rebates can earn recruitment agencies significant money. Let’s look at a scenario where an agency refers 50 workers to an umbrella company every month. If the workers are subjected to a £25 per week margin and £15 is paid to the agency as a rebate, the agency stands to profit from over £3,000 every month (at the temporary workers’ expense!)*

Rebates are often taboo and rarely spoken about within the sector. If you’re a temporary worker paying a high weekly margin, how do you feel knowing that your recruitment agency could be profiting from your weekly payroll? Please share your thoughts in the comments section below.

*Rough estimation based on rebate of £15 per week x 50 workers. Multiplied by 4 for the monthly estimate.

What is the difference between a gross umbrella company margin and a net umbrella company margin?

Most compliant umbrella companies will quote a “gross margin” – the amount they’ll retain before any deductions are made to your pay (the margin is taken from the gross salary). Therefore, you will save on tax. For example, if a gross margin is £20 per week, it won’t result in you losing £20 of your take-home pay. Instead, it’ll cost you less (more like £10-£15 per week – based on your circumstances and tax code, etc.).

Disappointingly, some umbrella companies have been known to brag about their low margin when they’ve been referencing their net margin – the amount it’ll cost you after tax. This means that the umbrella will be retaining more than they’re letting on, and we don’t like this deceitful behaviour. You are well within your rights to ask every umbrella you approach if they’re quoting you the gross or net margin.

Always remember – the gross margin is taken before tax, meaning it’ll cost you less. The net margin is the amount of your take-home pay you’ll have deducted.

How significant is the umbrella company margin when it comes to determining my take-home pay?

Compliant umbrella companies will process your payroll in precisely the same way – by following Pay As You Earn (PAYE) – HMRC’s tax system. The only thing that will vary between compliant umbrella companies is the margin they deduct for their service.

To put it simply, if you approach two compliant umbrella companies and both offer you a £20 per week gross margin, you should take home an identical amount of pay with each – to the penny. Both umbrella companies will make the same deductions to cater to your circumstances (income tax, Employee’s National Insurance, employment costs, student loan, pension, etc.), and this will include a £20 gross margin.

Therefore, if you approach two compliant umbrella companies, one with a £10 per week gross margin and the other with a £30 per week gross margin, you should expect to retain a little more of your pay with the umbrella company that has the £10 gross margin.

Is a low umbrella company margin the sign of a tax avoidance scheme?

A low weekly margin isn’t necessarily the sign of a tax avoidance scheme. Tax avoidance schemes usually stand out for other reasons, such as extremely inflated take-home pay projections (sometimes upwards of 90%). The common signs of a non-compliant umbrella company or tax avoidance scheme include:

  • Take-home pay projections are noticeably higher than compliant umbrella companies. Wording might include terminology such as “pay less tax” and “HMRC compliant”.
  • The company is based outside of the UK, usually in a known tax haven such as the Cayman Islands or the Isle of Mann.
  • There is a lack of information available on the website.
  • Expenses are actively promoted as a benefit (most umbrella employees cannot claim tax relief on expenses).
  • The company hasn’t been around long.
  • The company is not accredited by either the FCSA or Professional Passport. We’ve noticed some businesses boasting about having dodgy umbrella company accreditations too – be warned.
  • It’s difficult to find out who is behind the provider.
  • HMRC has issued the provider with a Scheme Reference Number (SRN). This means they’re under investigation.

For more information on tax avoidance schemes and the risks that are associated with engaging with them, please read our blog: The warning signs of a tax avoidance scheme.

Can you negotiate an umbrella company margin?

If you see a better deal elsewhere, or you think the umbrella company margin you’re currently on is too high, you’re well within your right to raise a query with customer services. Who knows? Maybe they’ll be prepared to price match another provider. After all, as the saying goes – if you don’t ask, you don’t get.

Where do umbrella company margins appear on a payslip?

Most often, umbrella company margins will appear at the very top of the payslip under the section entitled ‘company income received’ (or similar). We have created an example umbrella company payslip that you may find helpful.

Do you have any questions about umbrella company margins?

If you have any questions about umbrella company margins that are not covered in this guide, please leave a comment below, and we’ll do our best to answer your queries and publish the responses.

Click here to see our top 10 umbrella companies!

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