Could Changes Impact Umbrella Company Contractors?

Could Changes Impact Umbrella Company Contractors?

Contractors need to be aware of the impact the increase in the national minimum wage could have on them, particularly if they are working through an umbrella company.

From 1 October, for workers 21 and over the national minimum wage (hourly rate) rises from £6.19 to £6.31. While most contractors will be unaffected as they will be working for a rate higher than the national minimum wage, it is possible it could impact on those working through an umbrella company, as is them which provides the contractor with their contract of employment.

Stewart Davis, Group Commercial Director at PayMatters, the tax, payroll and umbrella company service, explains: “The way in which an umbrella company works can affect the amount paid. The company pays a wage based on the national minimum wage plus an increment in lieu of holiday and expenses incurred in carrying out the work. Any surplus from the money generated from the agency, less the umbrella company’s margin, is then paid as a commission.

Stewart adds: “While many contractors will be working at a higher rate than the national minimum wage, the rise in the rate can reduce take home pay because the actual contract of employment is through the umbrella company they work for.

“As the umbrella company can’t pay you more than you bring in if, having received your statutory entitlement of £6.31 an hour plus holiday pay and the umbrella company costs, there is insufficient income generated to pay all your expenses, then an element of those expenses will not be paid and instead rolled over to future pay periods.”

The contractor will not be out of pocket because of this change, as payment will be made of everything brought in, less umbrella company costs. Impact will be seen in net pay because expenses are paid tax free whereas the national minimum wage is not.

Stewart concludes: “The rise in the national minimum wage means that more of the amount you are reimbursed is taxable which leads to a restriction in the amount of expenses, tax free, you can be reimbursed. In reality the only people who will be affected are those who have high expenses or an agency contracted rate under £10 per hour.”

Established in 2008, the Wilmslow -based PayMatters has a team of more than 60 providing accountancy services to freelance contractors working either through its umbrella company or their own limited company.

PayMatters are APSCo accredited, professional passport approved and are business partners with the Institute Of Recruiters (IOR). PayMatters pride themselves on being fully HMRC compliant from an employers and employees NI, PAYE and expense perspective. For further information please contact Stewart Davis, Group Commercial Director on 07890 623003.