Umbrella companies for payment from Supply Agency

Anthear

Would be grateful for information about 'Umbrella Companies' used by Agencies who provide Supply teachers to schools.....

Recently joined an agency, told my rate was £X, to be called unexpectedly by an Umbrella company outlining the deductions from my day rate - 
- Employer's NI
- Weekly fee of £10
- My PAYE Income tax
- My NI

now, thinking about this, I wasn't told that I would pay the Employer's NI (is this legal??) - surely that is paid by the Agency employing me, not out of the rate I was told I would be paid??  I have been given a rate, Umbrella company said there should be an 'Umbrella Rate' which would mean the cost to me is the same as if I was paid directly by the Supply Agency.

Call me a cynic, but this all looks like a money-making ruse.  I am trying to find out more but decidedly uncomfortable....

Any benefits to me for going through this Umbrella company??

Anthear

Thanks for the comment.  Maybe so but I wasn't sent any T's and C's before I started work for them.....

Totally get that I would pay employees NI but if a pay rate is declared as say £100 and then you're told out of that there is employer's NI, employee NI and PAYE the latter two you would pay anywhere, the former is a charge the School would pay regardless of whether you were a perm employee or not??

I have worked for Agencies before, albeit a long time ago and this is new territory...

Grumpy_chap

If the role is inside IR35, then payment via an Umbrella Company is common.
If the role is outside IR35, then you would likely operate through your own Ltd Co.

The day rate inside IR35 needs to be about 25% more than the day rate outside IR35 for the actual income to the individual to be comparable.

The deductions set out by the OP for Umbrella Company for an inside IR35 role seem correct.

The OP may wish to consider increased employer pension contributions (from the inside IR35 day rate) to reduce tax and NI liabilities.  There is no need to be paid above NMW if the OP does not wish to be (though annual limits on tax-efficient pension contributions may apply).

The OP is unlikely to have a choice whether to use an Umbrella Company or not, but may have a choice to use one from a selection of Umbrella Companies.

Anthear

Grumpy_chap - no pension contributions have been offered so far....  so what you are saying is that the rate offered needs to be uplifted to account for the deductions?

My point is that EmployER'S NI is paid by the employER? Not sure why this is a charge passed to me just so that someone can make £10 a week out of me!

Grumpy_chap

Anthear said:

Grumpy_chap - no pension contributions have been offered so far....  so what you are saying is that the rate offered needs to be uplifted to account for the deductions?

My point is that EmployER'S NI is paid by the employER? Not sure why this is a charge passed to me just so that someone can make £10 a week out of me!

I am saying that UC rate is usually higher than Agency Rate and needs to be higher than own Ltd Co rate to result in the same take-home after everything is covered.  Normally, though, a specific role will only be available through one specific mode and the only rate that applies is the rate in the mode.

The agency would not normally have been the employer - though they can sometimes and the day-rate would be the far lower "agency rate" compared to the "UC rate" you have at present.

So, there is a gross rate that is paid to a company (either the Umbrella Company if inside IR35 or your Ltd Co if outside IR35).  The Umbrella Company or your Ltd Co is then the employer and pays the employer's NI out of the gross rate.

The difference with an Umbrella Company is that the remainder of the salary after the allowable deductions (which may include pension via salary sacrifice) is all gross salary (including employer's NI).  With own Ltd Co, the tax liability can be reduced in some cases by lower salary and taking dividends instead.  That option does not exist for Umbrella Company inside IR35 contract.

The following guide may assist (except the 5% deduction first step is generally no longer available):
https://www.gov.uk/guidance/how-to-calculate-the-deemed-employment-payment

As for the £10 per week, I consider that an absolute bargain.  It is only £520 per year and it defies belief how the UC business model can be sustainable at that level, especially given the potential liabilities they could be taking on for that small amount of money.

Operating as a free-lancer / supply / contingency worker comes with costs and risks, which suit some individuals better than others.  Those where the realities of contingency working are uncomfortable, then looking for a permanent regular staff job may be better.

In terms of take-home pay, for the same day rate, the order of maximum take-home pay is usually in the sequence own Ltd Co (highest) - UC - Agency (lowest).  If the role is inside IR35, then own Ltd Co is unlikely to be an option.

Anthear

Thank you for your comment "but there are also tax benefits that you can claim I believe, that they will also administer. So it may not cost you as much as you think in the long run."  If there are tax benefits, then they haven't been explained to me.  I received a indicative cost document which laid out the likely costs to me and these were much, much higher than I thought they would be.

Clearly I do need to 'get with the programme'; asking the question on this forum was a first step towards doing so.

unforeseen

For the most part, working under an Umbrella there are very few things that you can claim to give some sort of tax benefit. 

Marcon

Anthear said:

Grumpy_chap - no pension contributions have been offered so far....  so what you are saying is that the rate offered needs to be uplifted to account for the deductions?

My point is that EmployER'S NI is paid by the employER? Not sure why this is a charge passed to me just so that someone can make £10 a week out of me!

One of the most helpful explanations of umbrella companies (including why the employer's NI charge falls back on you!) is here: https://www.litrg.org.uk/sites/default/files/files/LITRG-Factsheet-working-through-an-umbrella-company.pdf

Anthear

Marcon - that's really helpful THANK YOU!  :-)

Marcon

Anthear said:

Marcon - that's really helpful THANK YOU!  :-)

Glad it helped. It's an incredibly useful website, not least because everything is so clear.

Sandtree

Anthear said:

Grumpy_chap - no pension contributions have been offered so far....  so what you are saying is that the rate offered needs to be uplifted to account for the deductions?

You will be auto-enrolled at 12 weeks and again the employers and employee contributions will be taken out of the monies paid to the umbrella 

Jillanddy said:
It is a long time since I last did consultancy work but even back then umbrella companies were becoming the norm for anyone who didn't have their own limited company status. I have never heard of anyone, even back then, getting a higher rate if they weren't employed directly. Perhaps it may happen, but I think it's rare. Agencies don't like employing people directly any more. So this may be disappointing but it is perhaps an early warning to be much more savvy about things as they now are. I think you can choose your own umbrella company - the agency can't force you to use any particular one, but I suspect there is little to choose between them. 

If its a long time since you did contracting then its likely that the term "umbrella company" covered a much broader spectrum of organisations. Back in the day some umbrellas enabled you to earn vast sums and never pay any tax however you were very much on your own if HMRC came knocking.

Knew one chap on over £1,000/day via a loan based umbrella so he was paid NMW for hours worked and the 93% of the remainder was given as a loan to him but the loan receivable was transferred to a trust fund of which he was the trustee. Did that for a decade before retiring at 50 overseas. Seen others with overseas film investments and other such tax mitigation tactics 

Since IR35 most umbrellas are now putting all monies through PAYE instead and whilst most agencies dont insist on a particular umbrella they often do require a certain standard to ensure they are IR35 compliant and not one of the dodgy ones.