HMRC have published further guidance (29th April 2021) to clarify the position on agency and contractors who are employees of umbrella organisations.
Those employed by umbrellas can find out about how and what they will be paid if they are an agency worker or contractor and work through an umbrella company.
Umbrella
HMRC agree an umbrella is a company that employs a temporary worker (an agency worker or contractor) on behalf of an employment agency. The agency will then provide the services of the worker to their clients.
Most umbrella companies employ workers using an employment contract which will set out your terms and conditions. They must comply with employment law.
If you are employed by an umbrella , the tax rules on agency workers and off-payroll working (IR35) do not apply.
Who pays wages
The umbrella company because they are the employer. They:
- pay for the work undertaken for the employment agency’s clients
- deduct any Income Tax and employee National Insurance contributions due under PAYE (Pay As You Earn)
How much is paid
This rate paid to the employee is after the costs for the umbrella company, which include:
- administration costs
- employer National Insurance contributions
- employer workplace pension contributions
- holiday pay
- other amounts to cover other specific costs, such as Apprenticeship Levy
The rate paid to the umbrella company by the agency will need to cover the costs of the employer National Insurance contributions. The umbrella company will use this money to pay employer contributions and not deduct the contributions from the employees gross pay.
The contract rate should be set in the employment contract. It is usually an hourly rate at the National Minimum Wage plus other taxable income often described as a bonus or additional pay. This is the gross pay before deductions.
If any of this amount is described as non-taxable, your umbrella company could be involving you in a tax avoidance scheme.
This gross pay is subject to deductions of Income Tax and employee National Insurance contributions, as well as other deductions such as pension contributions.
Who pays the employers NI?
An umbrella company cannot by law deduct employer National Insurance contributions from the gross pay.
If employer National Insurance contributions have been wrongly deducted from gross pay, or any other incorrect deductions have been made, then the employer (the umbrella company) should be contacted. If this does not work, contact ACAS (Advisory, Conciliation and Arbitration Service), Citizens Advice or trade union representative.
Holiday entitlement
Umbrella employees are entitled to paid statutory annual leave which is based on the hours worked.
Any annual leave owed on leaving must be paid.
How to understand your pay
Umbrella companies normally give their employees a listed reconciliation statement and a payslip.
Key information document
This gives information about pay and other details about employment. It will show the deductions and fees in relation to the assignment rate and contract rate and how this affects gross and net pay.
The document should make clear what the agency pays the umbrella company and what the contract rate will be.
Reconciliation statement
The reconciliation statement gives a breakdown of the assignment rate received by the umbrella company from the agency which lists the umbrella company’s costs, including employer National Insurance contributions. These amounts should be deducted from the umbrella company’s assignment rate, not the contract rate.
Payslip
The payslip will include a breakdown listing gross pay and deductions, including Income Tax and employee National Insurance contributions.
The payslip must show:
- pay (which is the contract rate) before and after any deductions
- the amount of deductions – these may change each time paid, for example the amount of Income Tax and employee National Insurance contributions you pay depends on the hours worked
- the number of hours worked, if pay varies depending on time worked
The umbrella is not allowed to make deductions unless:
- They are required by law
- They are agreed
- The contract states they can be applied
Tax avoidance
Most umbrella companies are compliant with the tax rules but some use tax avoidance schemes.
How the schemes work
Some umbrella companies claim to allow keeping more earnings than others. This could be disguised remuneration tax avoidance scheme.
They do not work, including those that may claim to be tax efficient or offer to increase your take-home pay. They sometimes carry high, non-refundable fees and are often provided by, or through, offshore promoters.
If asked to sign an annuity, loan or other agreement involving a non-taxable element of pay may be a tax avoidance scheme.
If using an avoidance scheme
Those impacted should contact HMRC so they can help resolve it and settle tax affairs.
Those caught using a tax avoidance schemes have to pay the tax that is legally due, plus interest and a penalty.
HMRC does not approve or endorse umbrella companies or tax avoidance schemes.
Find out how to identify schemes that wrongly claim to increase your take-home pay if you’re a contractor or agency worker.
How to report an umbrella company or other employer
If you think the umbrella company you work for, or another employer, is not complying with the tax rules, you can report it to HMRC using the online form.
HMRC guidance
The full guidance can be found at:
PAYadvice.UK 9/5/2021
Most tax avoidance schemes simply do not work, including those that may claim to be tax efficient or offer to increase your take-home pay. They sometimes carry high, non-refundable fees and are often provided by, or through, offshore promoters. HMRC’s ‘Tax avoidance – don’t get caught out’ campaign helps contractors who are self-employed or employed through an agency or umbrella company to understand their pay arrangements, so they do not get an unexpected tax bill.