Strictly speaking Umbrella Companies don't charge a "fee".

If they charged a fee then it would be subject to VAT. What they do do though is pass on an administration cost in calculating the profit on your contract. This is called the umbrella company's margin.

If you are a contractor and join an Umbrella Company you become an employee of the Umbrella Company. The service you perform is charged out to your client or recruitment agency and is collected by the Umbrella Company.

To meet statutory requirement your basic wage that appears on your payslip is calculated as the hours you have worked based on the statutory minimum wage. You are also paid holiday pay at 12.07% of your final gross pay figure (this removes the need to give you paid holidays). Some Umbrella Companies hold this money and do pay you when you take a holiday but the net effect over a year is the same and we feel it is better for you to have this money in your pocket rather than ours!

You can also be reimbursed for expenses you have incurred in performing your duties i.e. travelling to and from client etc. This is therefore paid tax free.

Your final pay element is a commission payment. This is calculated as the profit on the cash you've brought in . It is calculated as your chargeable time that has been paid by the client less amounts you've been paid previously (through statutory pay or expenses) less any costs incurred by the Umbrella Company (this is normally the notional administration cost and any employers national insurance (NIC's) the Umbrella Company has to pay on your wages). This ensures you receive all the "profit" on your contract.

You have to pay PAYE and Employees National Insurance on your gross pay (your statutory pay, holiday pay and commission).

For further advice or a free pay calculator please call PayMatters on 0800 121 6513.