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 |

Spotlight 55: When the umbrella company you work with is not a “compliant” umbrella. HMRC provide further warnings…

HMRC warn that comparison websites or brokers marketing umbrella companies are not always what they seem and urges contractors to do their due diligence.

With only a delay announced to the IR35 reform, it seems that there has (as predicted) been a hike in umbrella companies.  On 27th April , HMRC issued a new Spotlight urging contractors to take independent advice before working with an umbrella company to avoid finding themselves liable for unpaid tax and national insurance.

This new guidance warns that promoters of tax avoidance schemes are using brokers and price comparison websites to attract clients to umbrella companies not abiding by the tax rules. As has been the case for many years, these businesses try to convince contractors with offers of higher take home pay. Sites often mixing compliant and non-compliant providers, the latter sometimes being called ‘advanced’ or ‘enhanced’ umbrella services, which can make them sound like a legitimate PAYE umbrella.

HMRC’s Spotlight 55 publication provides guidance to workers on how to choose an umbrella including some of the warning signs to look out for. Taxpayers are told to be especially careful of arrangements offering higher take home pay involving:

  • annuities;
  • fiduciary receipts;
  • credit facility;
  • shares;
  • capital payments or advances; or
  • bonuses
  • loans

It would seem like common sense but HMRC are advising taxpayers to check whether the umbrella even has a company name, registration number and postal address. I say common sense, as you have to remember you trust these companies to handle your money – you wouldn’t just transfer your savings to any old bank, now would you?

A compliant umbrella company is used to employ a contractor, as an employee for tax purposes, while he or she performs work for an end client. The main function of a brolly is to facilitate payment to their employee, net of PAYE and National Insurance contributions (NIC). In essence, we act as tax collectors for HMRC, so if they don’t get what they expect it can lead to many shall we say issues and if these relate to personal taxes, it is HMRC that will come after you!

The challenge is that while most umbrellas comply with the tax rules for their workers, not all are quite so clean cut and with offers of greater take home pay some contractors can fall into that trap especially in such tough financial times.

Taxpayers are advised to be aware that if their salary is paid through different routes, they may not have paid income tax and NIC on all elements and independent professional advice should be sought. HMRC reminds those tempted that they remain legally responsible for their own tax affairs and for paying the correct amount of tax and NIC.

HMRC also warns taxpayers to be wary of claims, such as: “We only use HMRC compliant umbrella companies that are independently reviewed” and “QC approved”. For not the first time, HMRC highlight that they don’t approve umbrella companies and that it will always challenge tax avoidance arrangements.

Maybe now is the time for HMRC to go back to the announcement from the Taylor Review where they looked to regulate the industry. This was somewhat lacking in the last Finance Act, but maybe the delay to IR35 will give them time to try and provide a little more clarity in the industry and level out that playing field, cut out the self regulation and rid the market of those companies that continue to put contractors at risk of investigation by HMRC.

For further information see HMRC guidance Tax avoidance schemes aimed at contractors and agency workers.

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.

What does an umbrella company do?

So we’ve been asked to explain in simplistic terms what an umbrella company does! So here goes…

Working via an umbrella company is an alternative to operating your own Ltd company. It was deemed an option that required minimum hassle, minimum paperwork and ensured all taxes were paid at source under PAYE.

At Clarity, we run payroll for individuals who are working on a temporary assignment with a client, but wish for their taxes to be taken care of and to work under a contract of employment giving them statutory employment rights.

In April 2020, the way in which end clients engage with contractors is about to change (applicable to medium / large businesses). This is covered under a piece of legislation called IR35. If the end client deems an individual is akin to an employee, then HMRC expects them to be paid as an employee ie paying PAYE taxes, not drawing dividends!

Working via an umbrella company, the brolly is deemed the employer and the end client’s liabilities for tax are negated.

The contractor, should I say employee, is employed under a contract of employment, receives a payslip everytime they are paid, and at the end of the employment they will receive a P45, as per standard employment.

BUT, working via an umbrella company is not exactly the same as normal employment, so you will need to ensure that you know exactly what you are getting before you sign up.

For more information on understanding your take home through an umbrella please click here.