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: https://www.gov.uk/guidance/april-2020-changes-to-offpayroll-working-for-intermediaries

You may also find it helpful to use the Check Employment Status for Tax (CEST) tool:
https://www.gov.uk/guidance/check-employment-status-for-tax

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: www.gov.uk/guidance/ir35-what-to-do-if-itapplies

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:
www.gov.uk/guidance/april-2020-changes-to-off-payroll-working-for-intermediaries


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…

Day Rate & Take Home Pay

Day Rate and Take Home Pay

So you may have been told that your assignment is now inside IR35, or that you are required to use an umbrella company. If this is the case then you need to make sure that you are looking to achieve the right contract rate for your assignment, one that you are comfortable with.

Working via an umbrella company you need to be aware of the deductions that are taken from the monies received by the umbrella before your taxable salary is calculated (ie the value used to calculate your Employee’s NI and PAYE tax).

Detailed below is a snapshot of a range of day rates and the anticipated take home that you should expect if you are working via an umbrella. Please note we have to make certain assumptions when producing these illustrations.

Take Home Pay Breakdown from £100 per day to £1,000 per day

Assumptions:
This includes a standard 1250L tax code on a week 1 basis – this means that we will only take into account a single tax free allowance for this period. We never include any allowance for any expenses for tax relief purposes, and there is no pension included (with Clarity Umbrella you will be auto-enrolled into the our pension scheme 3 months after your assignment start date). We do not look to include any student loan calculations either.

If you do require a bespoke calculation, then please feel free to complete our Bespoke Calculation form and we will be more than happy to provide you with an illustration.

Image by Gerd Altmann from Pixabay

IR35 Alternative Models

We are aware of two options that businesses are currently considering but are there really any work arounds? In reality probably not!

We know what HMRC are looking to achieve, so could these options leave contractors and recruiters at risk?

Consultancy Work

Consultancy work is where the business acting as the consultancy will take responsibility for the delivery and quality of the services, this may involve taking on a larger project and sourcing expert contractors to deliver the work.

This will require the consultancy to provide increased insurance coverage and a consultancy model is particularly risky if there are no internal expertise on the type of service they are providing – at which point a project manager my need to be hired.

When used appropriately, this type of contract falls out of scope of the public sector off-payroll working rules.

From April 2020, if you are operating as a consultancy providing an outsourced service to your end-clients, for the purposes of the off-payroll working rules, you will be deemed as the client and therefore responsible for making the status determination statement.

Statement of Work (SOW)

The second option is a Statement of Work (SoW) or outcome-based contract.

If appropriately executed, it is likely to be “outside IR35” compared with the traditional time-based contact on a set hourly or day rate.

It may be possible for the client to have a direct contractual right to sue the contractor for poor services or failure to deliver meaning a recruiters risk is reduced (although clients may often prefer the security of pursuing the recruiter).

Furthermore, it is more likely that an assignment will fall “outside IR35” if the performance of the services carries a genuine business risk, e.g. payment is conditional upon acceptance of services or satisfactory performance, and rectification of defects or poor performance are made at the contractor’s cost.

Although this may seem like an easy option to adapt to the new rules, a recruiter will remain at risk if the reality of the contractual performance does not reflect the contractual wording.


In reality any work around for the new IR35 rules is likely to upset HMRC, and could lead to a crack down later on down the line.

Image by Arek Socha from Pixabay

When the IR35 Rules Apply

Assignments “Inside IR35”

So we are all seeing posts about who is liable to employment payments, whether uplifts need to be provided or whether contract rates are deemed acceptable to provide to the contractor.

Well if the client determines that an assignment is “inside IR35”, you need to understand what options are available in terms of an alternative to an off-payroll model.

The options are:

PAYE payroll (agency workers)
Where a recruitment business contracts directly with the worker and operates tax and NICs under agency rules and provides the workers with worker rights – the off-payroll working rules DO NOT apply.

Pay rate should be quoted as TAXABLE SALARY.

Umbrella Company
Where an umbrella company employs the worker directly, the off-payroll working rules DO NOT apply.

Pay rate should be quoted as CONTRACT RATE.

“Inside IR35” PSC
Should you wish to continue to engage as a contractor via your PSC who is deemed “inside IR35”, your recruiter will need to calculate a “deemed employment payment” using the RTI (Real Time Information) payroll system. The deemed employment pay rate is the income of the worker after deductions, including both employee and employer NICs and the Apprenticeship Levy. Neither worker rights nor stakeholder pension rights apply. No expenses allowance applies. The off-payroll working rules DO apply.

Pay rate should be quoted as TAXABLE SALARY.

Image by Gerd Altmann from Pixabay

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 JESHOOTS.com 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.