From a recruiter’s point of view, umbrella companies employ your contractors, charge you a fee for the work they complete, and pay them as their employees out of that fee. The fee you pay includes the umbrella’s profit margin and costs, which means the contractor will be paid less than you pay the umbrella company. If you’ve agreed a rate with the contractor that they’re expecting to receive, you’ll need to pay the umbrella company more. In this article we’ll look at how umbrella pay works, what it means for your costs, and what’s in it for recruiters like you.
What happens when you pay your umbrella company
So, your contractor has done the work for your client, and you’ve paid the agreed contract rate for their hours to the umbrella company – what happens next?
- The umbrella will retain their profit margin and cover their costs, including the cost of employer’s NI, apprenticeship levy, holiday pay and employer pension contributions.
- The remaining amount will be your contractor’s gross pay. The umbrella will pay the contractor through their PAYE system like any other employer.
What does this mean for the amount recruiters pay?
The contract rate you pay the umbrella company includes:
- The contractor’s gross pay
- The umbrella company’s profit margin
- Employer’s National Insurance
- Apprenticeship Levy
- Holiday pay
- Employer pension contributions
- Any other employment costs
It’s worth noting that many of these costs would have to be paid by the recruiter if they engaged the contractor directly, so while the contract rate needs to be uplifted, the increased cost to you is, in practice, very small.
Why do recruiters use umbrella companies?
On the surface it appears that engaging the contractor directly would cost less than engaging through an umbrella company would, even if the difference is very small. One wonders, then, why so many successful recruiters partner with umbrella companies and the answer is that a good umbrella company adds value, often saving you money at the same time.
The umbrella company can save you money because they take a whole series of tasks and risks off your hands. They pay for the specialist staff, systems and insurance that allow them to employ and pay thousands of contractors, so you don’t have to.
You receive added value because the employment of your contractors is in the hands of specialist experts. Your contractors get an easier life and a better experience, with predictable payments, full employment rights and additional benefits. This in turn makes both recruitment and retention easier for you, and allows you to concentrate on your core business, so you waste less time and make more money.
Is there a downside to umbrella company employment?
If your contractors are intending to continue contracting for more than a few payments, and the Limited company option is not suitable for them, then umbrella company employment is almost certainly the best option for everyone involved.
The one possible downside is that it needs to be explained carefully to your contractors, so they understand what they’re signing up for. Particular care should be taken to ensure they understand the difference between the contract rate and their pay, so they don’t think they’re paying the umbrella’s margin and employment costs.
This can usually be resolved by supplying a Key Information Document before they accept the assignment – which is a legal requirement no matter how they are engaged.
If you have questions or if we can help in any way, please call our expert team on 01604 360222 or email [email protected].
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