Are you considering contracting in 2024?

We are just weeks into January 2024 and the economic news paints a bleak picture. With frequent announcements of impending job cuts across many sectors, redundancy is a real threat for many workers. In light of this unstable job market, exploring contracting as an alternative may be tempting and could provide more security than permanent positions in the current climate.

Crawford Temple is CEO of Professional Passport, the UK’s largest independent assessor of payment intermediary compliance and he has some advice for anyone thinking of setting up as a contractor and working through an umbrella firm rather than through their own limited company. His tips should equip anyone considering or currently working with umbrellas to understand their structure, pay rates, rights, expenses policies and critical red flags to be aware of before selecting an umbrella partner.

What is an umbrella company?

An umbrella company acts as the direct employer for contractors working temporary assignments. Contractors are paid as employees through PAYE, with continuous contracting across assignments. Most umbrellas comply with employment and tax law, but without regulations, contractors must vet partners carefully.

Previously, agencies paid contractors directly. Under recent IR35 changes, known as the off- payroll legislation, agencies now often handle “inside IR35” contractors either on the agency’s payroll or through an umbrella. Many agencies now rely entirely on umbrellas to handle payroll, pensions and all other employer obligations the agency cannot take on itself.

What are the advantages for contractors?

As umbrella employees, contractors gain typical employee rights like minimum wage, paid holiday, pension auto-enrolment, sick pay and maternity/paternity protections. Umbrella employment also provides continuity between assignments where pay and rights might otherwise be interrupted. You gain the dual benefit of PAYE tax obligations together with continuous contracting flexibility.

How is the rate of pay calculated?

Understanding umbrella pay rates is key, as the rate the umbrella receives differs substantially from your take-home pay. Reputable umbrellas can provide “pay comparison” documentation to demonstrate how your net pay matches what you would receive under direct agency PAYE, once all deductions and contributions have been accounted for. As all umbrellas operate under the same tax rules, take-home pay should not vary more than a few pence between compliant firms. If one umbrella promises significantly higher net pay than this industry standard, they are likely concealing non-compliance that will incur future tax debts.

One way to monitor your earnings is by signing up for a Personal Tax Account with HMRC. With a Personal Tax Account, contractors can check that the earnings reported on their payslips are the same as those reported to HMRC, as the information is regularly updated following Real Time Information (RTI) submissions.

New guidance from the Government dictates that agencies should be clear about pay rates when they advertise a job. This is because when an agency passes a worker to an umbrella company, it must make sure that it hands over the correct amount of money to the umbrella company. This is the amount received from the end client as payment for the work. It includes the gross pay rate advertised to the worker (‘the agency rate’) plus all of the costs of employment the umbrella company will now have (for example holiday pay) and their margin. These things together make the ‘assignment rate’. This money becomes the umbrella company’s income, from which it will then pay you your wage.

As a contractor, be sure to understand what rate your agency is quoting you to work through an umbrella company – is it the ‘agency rate’ or is it the uplifted ‘assignment rate’? It should be the assignment rate.

How is holiday pay calculated?

Most umbrellas provide 28 days of paid holiday as part of contractual employment terms. Holiday pay funds accrue at 12.07% of your gross taxable pay, held by the umbrella to pay out when you take leave or are between assignments. If you work irregular hours, under a typical umbrella company contract, it used to be the case that your holiday entitlement would probably be calculated as a percentage of hours/earnings. 28 days paid leave (or 5.6 weeks) is equivalent to 12.07%, assuming a working year of 46.4 weeks (i.e. 52 weeks minus the 5.6 weeks). Some umbrella companies have an education-specific percentage of 14.36% as there is a shorter (39-week) working year.

What expenses can be claimed?

Expenses can be claimed against general earnings, like mileage to temporary work sites, or as separately reimbursed income if the agency repays specific costs. Reimbursed expenses require detailed documentation for the umbrella to verify tax compliance. Discuss expenses policies upfront to ensure the umbrella can accommodate your needs. Expenses are generally a complex process and where there is an expectation to claim either mileage or be reimbursed expenses from an agency then this should be discussed with the umbrella to ensure expectations align.

Be careful when selecting an Umbrella Company

Since the new look Off-Payroll legislation came into effect, a proliferation of schemes has arrived on the scene masquerading as “umbrellas” and offering a higher take-home pay. If you are tempted to unwittingly engage with one of these disguised remuneration schemes you could face significant future tax bills once HMRC discovers that.

Be warned and be alert; take-home pay should not be one of the criteria used to select an umbrella company as any compliant umbrella should all be offering within a few pence of each other. If it sounds too good to be true, alarm bells should sound.

With economic uncertainty ahead, umbrella work may appeal to first-time contractors concerned about job security and consistent income. But, conduct your due diligence and be informed about how your agency and umbrella work with you. Ask questions and challenge anything that is not clear.

*Crawford Temple is CEO and founder of Professional Passport, the UK’s leading assessor of payment intermediary compliance. Established in 2007, today Professional Passport is widely recognised as the benchmark of provider compliance with many in the supply chain now insisting on using Professional Passport accredited providers.

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