Becoming a contractor or freelancer doesn’t always mean you have to dive into invoicing and your own tax reporting. If you’d prefer to retain the benefits of more regular employment, you might want to consider working for an umbrella company.

Umbrella companies employ freelancers and handle the majority of the administrative and accountancy-based tasks on your behalf. One of the biggest benefits of working through an umbrella company is that you’ll be paid via the PAYE system in a similar fashion to someone in regular employment. 

In return for simplifying things for contractors, umbrella companies charge fees for their services. Understanding exactly what these fees might be is crucial in deciding whether working under one will help shelter you from the storm or leave you out in the cold. 

In this guide, we’ll break down umbrella companies to explore how they work and what their charges entail. We will also highlight any hidden costs to help you make the most informed decision possible.

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Understanding umbrella companies 

When it comes to getting paid for the work they do, freelancers and contractors may choose to register as self-employed, or even set up their own limited company. However, with both of these options, you’ll need to manage the administrative burden of taxes, pensions and other income-related issues like expenses. 

Umbrella companies exist to offer a simpler alternative for contractors who want to focus on the work without the stress of managing their own business. An umbrella company is a business that employs contractors and manages all of the administrative and financial obligations between you and your client. 

Rather than billing a client directly, you’ll submit your timesheet to your umbrella company and they’ll invoice the client for you, deducting all relevant taxes and fees before paying you through their payroll system. 

Using an umbrella company carries plenty of benefits, but there are also some clear drawbacks to be aware of: 

Pros:

• The company simplifies your tax management obligations by paying you through the PAYE system. 
• Working through an umbrella company allows you to access statutory benefits such as sick pay. 
• Allows you to retain continuous employment status even during client transitions. 
• Contractors benefit from a significantly reduced administrative workload. 

Cons:

• Your take-home pay will likely be less due to fees and charges.
• You’ll have less control over your finances than you would if you operated a limited company.
• Ensures IR35 compliance. Although, our Crunch Premium accounting package comes with a fantastic IR35 Twin Track which helps ensure IR35 compliance. So you get the best of both worlds. Learn more about the benefits here.

Exploring umbrella company fee models

Many contractors are unclear about how umbrella companies charge for their services…so let’s clear that up. 

Fees, which are also called ‘margins’, are how an umbrella company makes money. There’s no difference between fees and margins, they’re just two terms describing the same thing. The confusion instead comes from the two fee/margin structures an umbrella company may offer: 

• Fixed fees: A fixed amount deducted from your gross pay, charged either weekly or monthly
• Percentage fees: A percentage charged on your monthly earnings. Though this is often capped, it is an unpopular model as it can punish high earners

Understanding fee models helps contractors choose an umbrella company that aligns with their contract length and income expectations – so let’s dig a little deeper to determine which is best for you. 

At Crunch, we offer an umbrella service designed to take the stress out of compliance and admin. Whether you're working inside or outside IR35, we provide the flexibility you need with competitive, transparent fee structures. This way, you can focus on your work while we handle the complexities of taxes and payments.

Percentage fees in detail 

An umbrella company that charges percentage fees does so by taking a cut out of your revenue. This percentage remains the same regardless of your earnings, which means you’ll be hit with a more significant charge when you make more money. 

For example, if an umbrella company charged you 5% and you earned £3000 in your first month, you’d owe them £150. If you then earned £5000 next month, you’d have to pay £250. 

Percentage fees are typically capped, but they’re still incredibly unpopular for two good reasons. Firstly, umbrella companies have exactly the same administrative duties regardless of how much you earn, making charging more feel unfair. Secondly, unexpected ‘spikes’ in charges are always going to come as a surprise and take the shine off a profitable month. 

Unsurprisingly, most umbrella companies have abandoned this fee structure. 

What percentage do umbrella companies take?

Though percentage fees are rare, they’re not unheard of and are generally charged at rates between 3-5% of your monthly income. 

Fixed fees in detail

Fixed fees are far more predictable and are either charged at a flat rate on either a weekly or monthly basis. The agreed margin is deducted from your pay before any tax or NI contributions are taken. Every payslip will have the umbrella company’s deductions listed on it. 

How much do umbrella companies charge in fixed fees?

There are some outliers, but the most common average fee listed online varies between £20 and £25 per week.

Learn more about the ins and outs of contracting in our dedicated guide.

Uncovering hidden umbrella company costs and additional deductions

Despite the apparent straightforward pricing structure operated by umbrella companies, there are some hidden costs you need to be aware of when you’re working out whether to use one.

Some hidden costs include:

• Sign-up fees: Some companies charge a flat fee when you sign up, so be sure to read the small print.  
• Admin charges: Umbrella companies sometimes try to charge additional fees for administrative tasks that they should carry out anyway, such as providing copies of your payslip or P60. 
• Payment surcharges: If you want same-day payment, some umbrella companies may try to charge you an additional fee. Considering the fact that most businesses now use the faster payments system to allow for instant transfers of up to £250,000 24/7, this charge feels unnecessary and entirely for the company’s benefit. 
• Exit fees: If you decide to leave an umbrella company, whether to set up your own business or switch to another one, you might be charged an exit fee. 

When researching which umbrella company to use, make sure you ask them about all of these hidden charges to avoid confusion or nasty surprises. 

Avoiding non-compliant schemes

Don't get drawn in if an umbrella company boasts that it can boost your take-home pay with ‘tax-efficient’ schemes. This is a surefire sign that the umbrella company is not complying with HMRC regulations and may lead to severe penalties for you and the company. 

HMRC has fixed tax rules, meaning you will always pay the same amount of tax regardless of which umbrella company you work with. If one company claims they can reduce this, they will only be able to do so via dubious methods such as only paying some of your income through PAYE or paying through offshore structures. 

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HMRC cracks down heavily on companies practicing ‘disguised remuneration’. If you’re found to have taken part in this, even through no fault of your own, you’ll be forced to pay back any owed taxes and interest and may also be fined. 

How to spot a trustworthy umbrella company

Businesses live and die by their reputation and umbrella companies are no exception. Look for brands that have great reviews and are members of reputable professional organisations such as the FCSA (Freelancer & Contractor Services Association). You can also consider searching in contractor and freelancer forums or social networks to gather genuine opinions. 

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Weighing up employee benefits through an umbrella company

Working through an umbrella company provides you with access to certain employment rights and benefits that self-employed individuals might not receive. The main benefits include:

• Pension contributions: as an employer, umbrella companies must enroll you in a workplace pension scheme and deduct contributions automatically. 
• Statutory sick pay and parental leave: if you fall ill, your umbrella company must pay SSP for up to 28 weeks. You’ll also be eligible for statutory maternity/paternity pay

• Reimbursable expenses: if you’re self-employed or running a limited company, you can deduct business costs from your tax bill as expenses. Some umbrella companies offer reimbursable expenses but HMRC has strict rules in place that limit what you can expense for. 

All of these benefits can vary based on the employer, so you should speak to any umbrella company you’re interested in to see what their terms are before you make a decision. 

Is an umbrella company right for you?

Choosing whether or not to engage an umbrella company is all about personal preference. If you’re comfortable with the payment structure associated with regular employment, umbrella companies keep things simple and save you time and hassle. As long as you can avoid a percentage fee arrangement, umbrella company costs are typically quite manageable due to market competition. 

However, there are many benefits to taking the leap and going it alone as a self-employed person. You’ll have more control over your income and can better leverage expenses and other tax incentives that aren’t as readily available to employees of umbrella companies. 

If you’re only exploring umbrella companies because you’re intimidated by the admin and tax obligations associated with self-employment, Crunch is here to help. We offer a straightforward digital accounting service that makes it easy for you to keep track of your money and remain compliant with all of HMRC's rules and regulations. 

Visit our accountants for freelancers or Limited company page to learn more.