Contractor Rates Causing Confusion

The changes to IR35 are causing no end of questions and contractor rates are causing confusion; but we are faced with similar queries on a day to day basis, so we thought it might be useful to put something in writing for our network in the hope that it helps explain a few things.

The confusion comes in the first place when an agency quotes an assignment as inside IR35 with a rate attached to it. Based on the legislation, an inside IR35 rate means that the quoted figure should be stated as your taxable salary (ie subject to Employees NI and PAYE tax). The legislation is clear in this case that the employment costs cannot be passed onto the individual and will need to be accounted for by the end client (or via the agency).

However, we then see the agencies quoting the rate via umbrella, which in turn looks different (and probably shouldn’t reference IR35). Working via an umbrella company means that you are quoted a Gross Invoice Rate ie the rate that would be charged by the umbrella to the agency, plus VAT. When the funds are received by the umbrella company, the employment costs must be met from this figure (ie the Employers NI, Apprenticeship Levy and the umbrella margin) before reaching your taxable salary, again subject to Employees NI and PAYE tax.

So let’s take a look at a sample figure, quoted as an umbrella rate, based on £750.00 per day for 20 days per month with no pension on a standard 1250L X tax code:

Monthly Income (Gross Invoice Rate): £15,000.00 (£750.00 per day)

Employers NI: £1,710.73

Employment Tax: £65.64

Umbrella Margin: £95.00

Taxable Salary: £13,128.63 (£656.43 per day)

Employees NI: £584.23

PAYE: £4,209.48

Total Net Income: £8,334.91

So, as you can see a quoted umbrella rate of £750.00 per day will give you a taxable salary of £656.43 per day.

There is a lot of criticism surrounding the umbrella market and how it operates, but the model has been in existence for a long time, and believe it or not, it was always an alternative to operating via a Ltd Company until the IR35 reform popped up… and yes some contractor’s did actually opt to work in this manner, we know some find this difficult to believe.

What we would like to say is that when you are looking at a new assignment, take a moment to look at what is actually being offered and make sure that the rate is right for you and your circumstances.

For some umbrella won’t be an option, but for others it will be a requirement, so make sure you know exactly what you’re getting before you sign anything.

If you need any further clarity on this, then do let us know on 01473 845 835.

Lucy Smith, MD |

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