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!