One of the biggest sources of confusion for new umbrella company users is how contractor pay rates are quoted. Does your rate include ’employment costs’, and if so, what does this mean? Are some unscrupulous providers misleading about the so-called ‘inside IR35 rate’?
We asked Lucy Smith from Clarity Umbrella what contractors new to the umbrella market should look out for.
I’m confused about the different rates I’m being quoted – what’s the difference?
One of the biggest ongoing issues in the contracting industry is that people are not quite sure what the agencies are quoting them when the role is advertised.
Are you being quoted a contract rate, gross figures, your taxable salary, or a day rate?
This issue first arose in April 2021, when the IR35 (Off Payroll) changes were introduced to the private sector.
The intermediaries legislation states that employment costs (i.e. Employers NI & Apprenticeship Levy) cannot be passed down the chain to the contractor – that is the simple bit.
However, this is when confusing terminology comes into play.
The legislation states that if the end client determines a contractor to be inside IR35 (or the intermediary closest to the personal service company), then all employment costs must be deducted at source, and the net figure must be paid directly to the PSC.
At this point, we could claim that the rate provided is an “inside IR35 Rate”; this is in essence a “taxable salary” and would only be subject to Employees’ NI and PAYE tax (again deducted at source by the agency or end-client) paying the net to the contractor’s PSC.
What is the Assignment / Umbrella rate?
We are seeing many contractors quoted an umbrella rate or assignment rate, which is, and always has been, the gross (contract) rate or essentially the timesheet value per day.
If you are quoted an umbrella or assignment rate, then this is deemed to meet all employment costs before the taxable salary is arrived at.
To add to the confusion, as an employee of an umbrella company, you cannot be a disguised employee, and IR35 doesn’t even come into play. Tweaks to the legislation when it was issued wrote umbrella companies out of the legislation as they are not defined for this purpose as an “intermediary”.
Why should I pay Employers’ NICs if I use an umbrella company?
In contractual terms, you are not paying the Employer’s NICs, this must be met from the “assignment rate” before your taxable salary is met. So let us explain…
An umbrella company is an employer, and, like any other UK employer, it has a legal obligation to pay employers’ national insurance contributions to HMRC.
The umbrella company employs you under an overarching contract of employment and enters into a business-to-business contract with the recruitment agency or client.
The umbrella raises an invoice for the hours/days you work, which is then issued to the agency/client. The umbrella is paid for the invoice’s value, and they then pay the employer’s national insurance contributions from the contract amount received. The Apprenticeship Levy is also met as part of these employment costs.
Then, the umbrella usually retains a margin from that assignment rate for payment processing. The balance is your taxable salary, which is then subject to deductions for income tax and employee national insurance as with standard employment.
This model is the same for all compliant umbrella companies, as we all comply with the regulations surrounding PAYE.
Read more in our dedicated article on umbrella companies and employers’ NI.
So-called ‘inside IR35 rate’ causing confusion
Umbrella companies have existed since the removal of Managed Service Companies (MSCs), and compliant firms have always primarily operated in the same manner.
For many, an umbrella company was seen as an alternative to running a limited company. However, as IR35 has evolved, contractors are now having to face the fact that some agencies/end clients will determine their status in a manner contrary to how they worked previously.
This all comes down to what facts the contractors are being told, which requires understanding the agency’s part and that of the umbrella.
If a contractor is considering a role via an umbrella, then the figure quoted by the agency should be the Gross Assignment Rate.
If they are quoting an inside IR35 rate, this could be misconstrued and it could be argued that this should be the taxable salary, with the agency/end client should be providing an uplift to cover the employment costs. In reality, an umbrella company receives only one pot of money from the business, from which all costs must be met.
What should I look for in a Key Information Document?
The introduction of the Key Information Documents means that all figures must be disclosed to the contractor before any contractual arrangements are signed and sealed.
It is the agency’s responsibility to provide this to every contractor. However, we would urge any contractor to make sure that they receive an illustration from the umbrella company they choose to engage with which can be more bespoke to your current situation.
Potential regulation to safeguard workers?
In the last budget, the government proposed better measures against tax avoidance and cowboys in the industry, which should come into play in April 2026. That said, in an unusual turn, the government is proposing forced due diligence on the agencies.
This means that they are putting the onus on the agencies to ensure that they have all the relevant checks in place to ensure the umbrella companies are doing things properly to protect the workers.
It will be interesting to see if we get any specified definitions to confirm the difference between “assignment rate” and “taxable salary”.