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 |

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!