It is that time of year when the National Living Wage (NLW) and National Minimum Wage (NMW) increase. From 01st April 2021 the NLW increases from £8.72 to £8.91, the new NLW and NMW rates are set out below:
* Image courtesy of – https://www.gov.uk/government/publications/the-national-minimum-wage-in-2021
The NLW now applies to all workers 23+. Last year’s eligibility was 25+, with the government aim to come down to 21 by 2024.
How Are Umbrella Company Rates Calculated?
A worker is paid PAYE by the agency they complete work for, they are offered a rate of pay – say for example the current rate of £8.91. A worker costs the employer more than the rate of pay on the payslip, this is down to employment costs such as national insurance, apprenticeship levy, holiday pay, pension contributions. The agency has a duty to pass these costs to HMRC. When reporting to HRMC they must include these costs separately.
If however, PAYE employment is handled by the Umbrella company, they then become the employer of the worker and they are now responsible for paying those employment costs. Naturally, the amount paid to the worker must be at the very least the NMW, which means the contract rate paid to the Umbrella company must be higher than what is offered directly via the agency. In this instance, if the agency offers £8.72, the Umbrella company rate should be £11.34.
What Are Tax Codes?
All umbrella companies operate PAYE. This means your wages will be taxed accordingly each time you’re paid whether this is weekly or monthly, the same as you would if you were a permanent employee of a company. Your National Insurance contributions are deducted as a percentage of your earnings, this percentage is the same across all companies.
However, income tax calculations are a little more complex. Everyone has a tax code, this determines their tax-free pay entitlement.
Example: The standard tax code for 2020/21 is 1250L, this means you can earn £12,500 per tax year before you are required to pay income tax.
Then every pound earned over this threshold will be taxed at 20% up to the next threshold of £37,500; every pound above this up until the £150,000 threshold will be taxed at 40% and the final tier is £150k+ taxed at a rate of 45%.
How Are Some Umbrella Companies Offering a Lower Minimum Rate?
An umbrella company rate will always be higher than a direct agency PAYE rate, to incorporate employment costs. If it isn’t you will want to check the Umbrella company is compliant, as company costs must be factored in at some point along the supply chain.
In addition, some Umbrella companies could potentially be omitting certain deductions, pension deductions are a good example of this. Pension auto-enrolment is deferred for the first 12 weeks of an assignment, this results in many believing they can omit this cost when sending to an Umbrella company. This can cause problems, when pension contributions start, how will the agency account for this? It can lead to the worker being taken below minimum wage, which is illegal. Also if you are found to be opting your workers out of a pension prior to employment, you’re depriving them of an employment benefit which is once again illegal.
If an Umbrella company is found to be underpaying their workers the consequences are extremely serious. This will result in being issued a notice by HMRC requiring repayment to the affected worker(s) and paying a penalty fee to the government. Also, it can lead to a massive dent in a company’s reputation, as the government has been known to ‘name and shame’ companies who underpay workers. Therefore it makes business sense to protect your reputation by covering all costs from the get-go.