Contractor Rates Causing Confusion

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 |

Moving from Ltd to Umbrella, what do you need to consider?

The IR35 Reform hits and you need to change from your Ltd Company to work via an umbrella company, what do you need to consider?

In April 2021, we expect to see the IR35 reform in the private sector, and as we head closer to that deadline many end clients are back to reviewing their decisions. So if you’ve been operating via your own Ltd company and are now being asked to operate via an umbrella company what do you need to consider?

When you register with an umbrella company, you will be asked to provide a P45 or Starter Checklist in order for them to set you up on the system, but what are the implications of using each one?

If you don’t have a P45 from your Ltd company then the starter checklist will (assuming you pick Statement B i.e. have worked this tax year, but have no other PAYE earnings) place you on a 1250L W1/M1 tax code, this allocates one tax free allowance for the pay period. 

All this means is that once the first payroll is processed and reported via RTI, then you will more than likely receive a coding notice to amend your tax code. The problem is that HMRC are likely to think you have two PAYE incomes; one from the umbrella and one from your Ltd company. They will then determine where any tax free allowance lies, more than likely leaving this on your Ltd company and no tax free allowance with the umbrella. So you may be in a situation whereby you have to speak with HMRC and ask them to allocate all the tax free allowance to your umbrella employment, assuming no PAYE income from the Ltd company.

So the ideal situation is that you get your accountant to P45 you off the Ltd company, this should then allocate tax free earnings to the new umbrella employment. It may also mean you end up with little or no tax taken in the first pay-packet, assuming you’ve drawn little PAYE earnings from the Ltd company. This would also be dependent on what point in the year the transition happens.

You may also need to consider your annualised earnings… When the umbrella earnings are reported to HMRC, they will take your earnings for the period and assume you will be earning that amount throughout the remainder of the financial year. With many high earners, this could place you in the high earner category and could see any tax free allowance removed. For many contractors, we know that there can be some time spent on the bench, so the anticipated annual earnings may not be as high as predicted by HMRC. If this is the case, then may be able to log into your own personal tax account and see what assumptions HMRC are making and, if needs be, you may be able to amend this.

At the end of the umbrella employment, if you still have the Ltd company, make sure you get your P45 and pass this back to your accountant, so they can update your tax affairs ready for inclusion as employed PAYE income on your self assessment tax return.

HMRC announces “small” change to the off-payroll working rules

Well today, 7th February 2020, we see a “small” change to the IR35 Legislation which comes into force in just a few weeks time.

The original draft appears to have caused confusion over payments and when the rules should actually apply. Previously any payments made after the April deadline would have seen the rules apply and the appropriate deductions made, even if the work was carried out in March. However, as part of the actual IR35 review, it has been decided that there was not enough clarification on this and has lead to some snap decisions for end client and agencies.

So what exactly has been said?

“The rules, also known as IR35, will now apply only to payments made for services provided on or after 6 April 2020. Previously, the rules would have applied to any payments made on or after 6 April 2020, regardless of when the services were carried out. It means organisations will only need to determine whether the rules apply for contracts they plan to continue beyond 6 April 2020, supporting businesses as they prepare.”

The formal publication of a review into the implementation of changes to the off-payroll working rules is due to conclude in February.

#ir35 #clarityumbrella #contractors

For more information, please click on the link below:

What Rate Am I Asking For?

Umbrella Rate, Pay Rate, Gross Rate, Contract Rate, Inside Rate, Agency Rate?

Wow, what a confusing topic – or so it seems according to social media!

Following on from many conversations with contractors it would appear that not only are the contractors being left thoroughly confused by the advertised rates but that some recruiters don’t appear to be able to clarify things either. So let’s take a look at what it all means…

1. Umbrella Rate – the figure quoted to you should be the Gross Rate (sometimes referred to as the Contract Rate). This is the figure per day invoiced out to the agency or end client, when the umbrella receives these funds the employment costs must be met from this figure before the employment income (or taxable salary) is reached. If we apply logic, the umbrella will take their margin from the gross rate along with the employment costs, there are no funds coming from elsewhere, this is the monies received from which employment costs must be met. The umbrella margin is not going to be enough to cover these costs. IR35 doesn’t apply in this scenario as you are deemed an employee of the umbrella.

2. Agency Rate – this “should” be quoted as the employment income (taxable salary) and would then only be subject to Employees NI and PAYE tax. We would normally expect to see a lower rate offered for Agency PAYE over umbrella, with the uplift accounting for the employment costs.

3. Inside IR35 Rate – and this is where the confusion lies! As has been stated on many occasions on social media, under the proposed IR35 Legislation, the rate must be quoted as “employment income”, net of any hirer’s taxes. The employment costs are not to be included within this rate and must be met by the end hirer or agency closest to the PSC. IR35 applies.

So this begs the question, how do I know what I am being quoted?

On the 6th April 2020, legislation will mean that the agency or end client must provide a KID (Key Information Document) to any contractor prior to any contracts being signed. This should detail the rate and the deductions dependent on which route you are looking to proceed down for your assignment. In the meantime it simply leads to confusion.

If you work via an umbrella company then you are deemed an employee and as such the IR35 legislation does not come into play. So if you are being moved to an umbrella ready for the April changes, they should be quoting you an umbrella rate which will be subject to employment costs, if they are quoting you an inside IR35 rate then feasibly you should be expecting the agency or end client to meet those employment costs.

In reality what seems to have happened is that contractors are being told that their assignment is deemed inside IR35 and they are being pushed down the umbrella, sometimes with no uplift in rate, leaving the rate to swallow the employment costs.

As I have said all along, it is imperative that when you are looking for a new assignment that you ensure you get clarity on what “rate” you are being provided with. If you are being asked to go down the umbrella route, ask for umbrella rate vs inside IR35 rate and see what response you get! My theory is that it will confuse the living daylights out of most!

IR35 Factsheet for Contractors

IR35 Factsheet for Contractors

HMRC have issued a factsheet aimed at contractors to explain the changes to Off-Payroll working rules (IR35). So let’s see what they have to say…
Taken from the HMRC Website “IR35 Factsheet for Contractors”

There are some important changes to employment taxes coming into effect from 6 April 2020.

Are you affected?

You are affected by the changes to the off-payroll working rules (IR35) if:

• You are a contractor who works through an intermediary, e.g. your own limited company, often known as a personal service company (PSC), and

• You provide your services to public sector organisations or medium or large-sized organisations outside of the public sector.

A medium or large-sized organisation will have a turnover of more than £10.2million, a balance sheet total of £5.1m and/or more than 50 employees.

What is changing?

From 6 April 2020, medium and large-sized organisations outside the public sector will be responsible for deciding the employment status of contractors for tax purposes. Currently, contractors themselves are responsible for making this decision in these sectors.

This ensures consistency with the public sector, where these arrangements have been in place since April 2017.

How the changes may affect you

These changes may affect how you pay the tax and National Insurance contributions that are due.

If you are affected, the organisation you are providing your services to will determine your employment status for tax purposes from 6 April 2020. Your hirer will give you a ‘Status Determination Statement’, which will set out the determination your hirer has made and the reasons behind this. You may be asked to provide the hirer with some information to help them make their determination.

If they determine that you are employed for tax purposes, they (or the agency they have hired you through) will pay the necessary tax and National Insurance before they pay you.

If they determine that you are self-employed for tax purposes, you will remain responsible for meeting your tax obligations.

Depending on your own personal circumstances the terms of your contract may change. It is also possible that you will pay additional income tax and NICs if you had not previously been applying the off-payroll rules (IR35) correctly. However, HMRC will not use information resulting from these changes to open a new enquiry into earlier years unless there is reason to suspect fraud or criminal behaviour.

What you need to do before April…

You do not need to take any action before April. But if you think you may be affected you should seek a Status Determination Statement from your hirer, and speak to them to help you understand what this means for you.

You can find further guidance at:

You may also find it helpful to use the Check Employment Status for Tax (CEST) tool:

Important information

These changes do not affect the self-employed nor do they prevent people from working through their own intermediary. It does not introduce a new tax but instead changes the way that the tax is collected when a contractor is inside the scope of IR35 and employed for tax purposes.

Guidance on the current rules can be found at:

On 7 January 2020, the Government launched a review into the implementation of changes to the off-payroll working rules. The review will gather evidence from affected individuals and businesses to ensure smooth implementation of the reforms, which are due to be introduced on 6 April 2020.

Your rights

Where the rules apply, it is important to note that, unless you have a direct employment contract, you will not be classed as a direct employee of the hiring organisation you provide your services to. This means that you will not be entitled to statutory payments or employment rights from them.

From 6 April 2020, if you disagree with the result of the determination, you will have the right to dispute it through your hirer’s status disagreement process. You will need to contact your hirer, explaining why you are challenging the outcome. The hirer will have 45 days from the date of receiving your letter to respond to you.

Further Information:
More information on the changes can be found on GOV.UK at:

Contract Rate & Taxable Salary

In April 2020, legislation changes and means that it will be a legal requirement for every recruiter/engager to provide the agency worker with a KID (Key Information Document), but what does this actually mean?

The KID document is supposed to provide clarity with the rates provided and the model they use to engage with. So let’s take a look at what this means in practice as there appears to much controversy floating around over what figures should be supplied…

OPTION 1: Agency worker paid PAYE via the agency know as Agency PAYE.
The figure quoted will be the TAXABLE SALARY, this will be subject to Employees NI and PAYE tax. We would anticipate this being less than that offered for Umbrella PAYE.

OPTION 2: Umbrella PAYE paid via the Umbrella Company as an “employee ” of the umbrella.
The figure quoted will be the CONTRACT RATE. All employment costs must be met from this figure prior to arriving at the taxable salary. To calculate the TAXABLE SALARY, take the daily or hourly rate, deduct the Employers NI, Apprenticeship Levy, Umbrella Margin (and EEs and ERs pension if applicable). This figure will give you the equivalent Agency PAYE rate. On this basis we would expect to see a higher figure to cover the additional deductions from the contract rate.

Umbrella PAYE places the contract worker under deemed employment, and as such sits outside of the IR35 legislation. It has always been deemed as an alternative way of working to running a PSC, as long as the contractor is aware that the rate they need to negotiate is going to be subject to these deductions.

OPTION 3: Ltd company engagement paid direct to the contractors own PSC.
The figure quoted will be the CONTRACT RATE. All employment costs must be met from this figure prior to arriving at the taxable salary. The only difference to the above is the ability for certain expenses to be accounted for and any dividend payments.

So what is the key thing to take from this?

When looking for that next assignment, especially if the contract is deemed inside IR35, then you need to ensure that you are pitching for the correct rate for the role. Remember, the IR35 legislation hasn’t actually changed, the only thing that has been updated is where the liability for determining the status falls. So if you have been operating compliantly in the first place, and the end client / agency is happy to run through this then there should be no change for you.

If however, there is a blanket decision made on the contractor’s status, then you may be left with no choice at this time. The contracting market has seen many changes over the years… when IR35 came into the public sector there was panic, but it soon settled back to normality. Let’s hope this is just a storm in a teacup…

IR35 in the Private Sector is coming… but are you prepared?

IR35 in the Private Sector is coming… but are you prepared?

Private sector firms need to prepare and take their time to understand the complexities of the incoming IR35 tax avoidance reforms or risk losing their contractor talent!

Under the reforms due in April 2020, medium to large private-sector organisations will take responsibility for determining whether the contractors they engage with should be taxed in the same way as salaried employees (inside IR35) or off-payroll workers (outside IR35).

Under the current legislation, it is down to contractors to self-declare how they think they should be taxed.

In April 2017, the IR35 reform in the Public Sector was introduced and in the lead-up to and aftermath to these changes, there were numerous reports of contractors walking out across government departments, and claims that many had had their engagements incorrectly classified.

It is now feared that the same could happen again once the reforms apply to the private sector, unless firms take the time now to get to grips with the rules and their new responsibilities and we are starting to see some of the tell tale signs emerging…

Barclays prepare for IR35 reforms…

According to HMRC’s IR35 guidance, organisations are supposed to assess the tax status of each contractor they engage with on an individual basis, but evidence from the Public Sector Reform suggests that has not always been the case and the announcement by Barclays has come as no real surprise!

A knock on effect of large businesses refusing to engage limited company contractors due to IR35 changes from April 2020 has begun. Morgan Stanley and M&G Investments, Barclays and Lloyds have now all said that they will not enter into contractual agreements with PSC engagements.

IR35 & Working with Clarity Umbrella

For those contractor’s caught in the cross fire, working via an umbrella company may be one of the options they have moving forwards. If you are looking to operate via an umbrella then you need to make sure you understand exactly what you are getting before you accept the assignment.

One of the biggest changes will be that to your take home, if you are not able to negotiate a rate increase, then please do use our online calculator to assess what your take home may be working as an employee of the umbrella.

Photo by from Pexels.