One of the biggest sources of confusion for new umbrella company users lies in the way contractor pay rates are quoted. Does your rate include ’employment costs’, and if so, what does this mean? And are some unscrupulous providers misleading over the so-called ‘inside R35 rate’?
We asked Lucy Smith, from Clarity Umbrella, what contractors new to the umbrella market need to look out for.
I’m confused about the different rates I’m being quoted – what’s the difference?
The biggest issue we have in the industry at the moment is that people are not quite sure what umbrella companies are quoting them. Are you being quoted a contract rate, gross figures, your taxable salary, or a day rate?
This issue has come about with the looming introduction of the IR35 changes to the private sector. The 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 deems 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 paid directly to the PSC.
At this point, we could state 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 by the agency or end-client).
What we are seeing is that many contractors are being quoted an “umbrella rate” which is, and always has been the Gross (Contract) Rate. If you are quoted an umbrella rate then this is deemed to meet all employment costs before the taxable salary is arrived at.
To add to the confusion – as you are an employee of an umbrella company, you cannot be a disguised employee and IR35 doesn’t even come into play.
Why should I be paying Employers’ NICs if I use an umbrella company?
An umbrella company is an employer and, as with any other UK employer, they have a legal obligation to pay employers’ national insurance contributions to HMRC. The umbrella company employs you under an over-arching contract of employment and enters into a business-to-business contract with the recruitment agency or client.
An invoice is raised by the umbrella for the hours / days you work; this is then issued to the agency/client. Payment is made to the umbrella for the value of the invoice and they then pay the employer’s national insurance contributions from the contract amount received.
The umbrella will usually retain a margin from that contract rate for processing the payments. The balance is your taxable salary; this is then subject to deductions for income tax and employee’s national insurance as with standard employment.
This model is the same for all compliant umbrella companies, as we all have to comply with the regulations, which surround PAYE. Find out more in our dedicated article on umbrella companies and employers’ NI.
What have some unscrupulous umbrella providers been doing?
Umbrella companies have been in existence since the removal of Managed Service Companies (MSCs) and compliant firms have always primarily operated in the same manner. An umbrella company was seen as an alternative to running a limited company for many, however as IR35 has evolved, contractors are now having to face the fact that some agencies / end clients will determine their status to the contrary of the manner in which they worked previously.
This all comes down to what facts the contractors are being told, which requires an understanding on the agencies part and that of the umbrella. Post-April, if a contractor is looking at a role which is via an umbrella then the figure quoted by the agency should be the Gross Contract Rate. If they are quoting an inside IR35 rate then this could be misconstrued and would be argued that this should be the taxable salary with the agency/end client covering all employment costs.
In reality an umbrella company only has one pot of money coming into the business from which all costs have to be met.
What should I look out for on a KID from April?
Post April, this should be made a lot clearer to the contractors. The introduction of the Key Information Documents means that all figures must be clearly disclosed to the contractor before any contractual arrangements are signed and sealed.
It is the agencies responsibility to provide this to every contractor under the Good Work Review. Until the 6th April deadline there is no requirement for this to be done, however it could prove to be useful for those looking to be pro-active and assist the contractors with making a decision on whether to accept or even consider an assignment.
The biggest issue at present is for those contractors whose assignments span this April threshold. We are seeing many contractors having their contracts terminated by the end of the March, and transferred inside IR35 by the client / agency. If the assignment continues in exactly the same manner as before, then it could be argued that the contractors should be quoted a taxable salary which shows the agency / end client accounting for employment costs, inline with IR35 legislation.
Or if they are being forced down the umbrella route, then in theory the rate should be uplifted to cover these additional costs from the gross contract rate.