If you’re new to umbrella companies, you may have many questions. In practice, using an umbrella company is straightforward, but they can sound super complex. The UK Contracting Support Website is a free resource that’ll try and answer the most frequently asked questions by self-employed professionals in the UK. In this short blog, we look to answer – what is an umbrella company margin?
Compliant umbrella companies all operate in the same way. They will receive a contractor’s gross pay from the recruitment agency or direct from the end-hirer. Then, they will make the appropriate deductions to it before issuing the contractor with their net salary (PAYE). Throughout this process, the contractor becomes an employee if the contractor and, as a result, will have access to employee rights (including Statutory Sick Pay and Maternity Pay). However, enough about umbrella companies and how they work. Let’s focus on the umbrella company margin.
Every deduction that the umbrella companies make to their contractors (employees) pay is sent directly to HMRC on their behalf (PAYE). However, there is one exception – the umbrella company margin. The margin is effectively the fee that the umbrella charges for processing the payroll of their employees. The phrase margin is used for compliance reasons, but effectively, you could consider this the umbrella company fee or the umbrella company cost.
Umbrella companies deduct a margin to cover their costs. After all, businesses need to generate revenue to survive. The size of the margin will depend on individual umbrella companies. Usually, an umbrella company margin will vary between £15 and £30 per week. And, if you’re paid monthly, there will be a monthly margin too. The margin is the only thing that should impact contractors’ take-home pay. This is because all compliant umbrella companies will process their employees’ payroll identically – and in accordance with HMRC (PAYE). The point we’re making – the lower the margin, the better off you’ll be – but not by much. Therefore, don’t be tempted to use the umbrella company with the lowest margin if you’re not convinced by the service they’re offering.
The umbrella company margin will be deducted from their employee’s gross pay – meaning it’ll be taken before tax and National Insurance deductions are made. In reality, this makes the margin lower for contractors using umbrella companies. Therefore, a £25 weekly margin will cost you less than £25 per week, in reality. It’s also worth noting that the umbrella company margin only applies when a contractor is paid by the umbrella. This means that should a contractor not be paid for 6 weeks, for example, they will not be responsible for any margins.
Umbrella companies don’t just process payroll. They’ll usually include a load of extras for their employees to increase the value they receive. For example, most umbrella companies will include free insurance, Account Management, discount schemes, and more. Their primary objective is to process payroll, and this is what they do. Any extras should be welcomed, and by all means – shop around for an umbrella company that offers you extra value.
To summarise, the umbrella company margin is the amount an umbrella company retains in exchange for processing the payroll of its employees. The margin is the only thing that should impact your take-home pay between compliant umbrella companies.