IR35/Off-Payroll Working – Umbrellas and Agencies

This article is based on HMRC information ESM2390.

What is an ‘umbrella company‘?

There is no statutory definition of an ‘umbrella company’.

It is generally accepted that an umbrella company is a company that employs temporary workers who work for different end clients’.

Typically they enter into a contract with a recruitment agency who will source work from end clients.

Employment contract and agreements

The worker is an employee of the umbrella company. There should be a contract of employment which defines the working terms and conditions.

A contractual agreement should be in place between the umbrella company and the recruitment agency for the provision of the worker’s services, and there should be a contractual agreement in place between the recruitment agency and the end client relating to the supply of the worker to the end client.

Payments

The end clients pay the recruitment company an agreed rate. The recruitment company and the umbrella will have defined terms of payment.

The legal rights to this payment are between the umbrella and the recruitment agency.

Umbrella overheads

The umbrella has its overheads so will typically retain:

  • An administration fee
  • An amount to meet the umbrellas Employer National Insurance Contributions (NICs)
  • An amount to cover their employers obligations for holiday pay
  • An amount to cover the employers pension contributions due
  • Any allowable expenses
  • Other amounts to cover specifics costs such as any apprenticeship levy

The rest is paid to the worker as gross pay.

So what amount is subject to tax and NICs?

The gross pay paid to the worker as agreed is the income for tax and National Insurance. This should be after any umbrella overhead provisions.

Payslip / Pay statement

The Umbrella should provide the worker with an itemised payslip to which they are legally entitled.

The payslip will provide a breakdown of the payment received by the umbrella from the agency, the umbrella overheads including employer’s NICs.

The payslip will also include a separate breakdown of the worker’s gross pay and deductions.

Employers NIC confusion!

The inclusion of employer’s NICs causes confusion with workers who believe they are paying the employer’s deductions. This is not the case as employer’s NICs is deducted from the payment the umbrella company receives from the recruitment company and which which they have the legal right to.

Employers, which includes umbrella companies, cannot by law deduct employer’s NICS from a worker’s gross pay.

So any reduction applied to cover the umbrella overheads would be before defining the gross pay being paid over to the employee. The secondary employer NIC would then be met fully by the umbrella from the overhead money’s accounted prior to the defining of the agreed gross pay, else the wrong amount of tax and NICs would be accounted.

Examples

Correctly constructed arrangement:

Incorrect construction:

If the umbrella deducts the secondary NICs and App Levy from the taxable gross, then the tax and National Insurance amounts will be incorrect. The employer is not allowed to deduct the employer NICs nor the App Levy from the agreed Grossed Payment (the taxable gross).

Do umbrellas get it right?

It’s a mixed bag. Some do operate the pay aspects correctly, and other do not. Some have attempted to construct arrangements which may be viewed as tax avoidance schemes that fail legally. So there is an element of caution.

Check the agreed gross payment, the taxable gross, as umbrella fees and deductions such as secondary employer NI should not be deducted from this agreed payment. Also, as an employee, there are holiday pay, sickness and parental leave and pay rights dependent on the payments meeting qualifying conditions. Equally, employees of umbrellas can qualify for furlough grant payments, if claimed the amounts must be paid in full with no umbrella overhead deductions.

Disputes on itemised payslips!

Every effort should be made to resolve disputes with the umbrella who is acting as employer.

If unable to resolve, then advice can be obtained from the Advisory, Conciliation and Arbitration Service (ACAS) via their helpline number 0300 123 1100 or the ACAS Helpline Online tool.

More information

PAYadvice.UK 28/3/2021 updated 3/4/2021

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