Who is calling the shots here, HMRC or the umbrella companies?
That’s a question hundreds of thousands of temp workers and contractors have been asking about a government tax loophole that allows temp workers to pay Apprentice Levies, where in all fairness, it should be the obligation of the umbrella companies.
However, justice could be served if the union, Unite, has anything to say about it. The union has entered a legal battle with constriction firms that have inadvertently allowed construction workers, who get paid via umbrella companies, to foot the umbrella companies’ Apprentice Levy bills. The union has highlighted in recent years that workers in any sector working through an umbrella company could be lobbed with Apprentice Levy charges.
This loophole exists despite traditional employers not being allowed to deduct the apprenticeship levy from the gross salary of their employees. That’s because government rules allow umbrella companies, which are the employers of umbrella company workers, to deduct amounts to cover its administration and other costs, including the apprenticeship levy, from their overall rates.
This comes down to the fact that umbrella companies can pay their workers two different rates, the contract rate and the worker’s wages.
“The legislation is restricted to deductions from the worker’s wages, not the contract rate. So, currently, because there is a lack of clarity and no regulation, umbrella companies can deduct from the contract rate and it’s not illegal or an unlawful deduction of wages,” said Rebecca Seeley Harris, an employment status specialist, in a LinkedIn post.
Many umbrella company workers are pinning their hopes on any Unite legal cases to shed some clarity over this two-rate system. Those that pay the levy are also asking for proof that their money is being well spent.
“Since the levy’s launch in 2017, hundreds of millions of pounds of unspent apprenticeships funding has been returned to the Treasury each year against an annual budget of £2.5 billion,” FE Week reported. “However, that underspend shrank to just £11 million in 2021-22 when 99.6 per cent of the budget was used,” said the report.
Below is a condensed version of HMRC’s latest guidance when working through an umbrella company:
How you get paid
When you send your timesheet to the recruitment agency, it charges the client.
The recruitment agency then pays the umbrella company the agreed rate. This should be the assignment rate multiplied by the time you have worked.
The umbrella company is responsible for paying you as your employer.
Some umbrella companies may choose to pay the National Minimum Wage rate for all hours worked and then make up your full rate with an additional payment, like a bonus. You must still pay tax on this additional payment and your payslip must show this and all the hours you’ve worked.
Understanding how your gross pay is calculated
You have a right to a payslip that shows your pay.
You may also receive a ‘reconciliation statement’ from the umbrella company which shows you how your gross pay is worked out from the assignment rate.
How an umbrella company works out your gross pay from the assignment rate
The recruitment agency pays the umbrella company the assignment rate, then the umbrella company makes several deductions to work out your gross pay.
The reconciliation statement shows the breakdown of these deductions. You should normally see the following deductions on the statement:
- umbrella company operating costs (sometimes called ‘margin’)
- employer National Insurance contribution
- employer workplace pension contribution
- holiday pay
- Apprenticeship Levy (if applicable)
The amount after these deductions have been taken off is your gross pay.
If you do not understand the deductions, or if you are not given a breakdown of them, you should speak to your umbrella company.
Checking your payslip
Your umbrella company will then deduct the following from your gross pay:
- Income Tax
- employee National Insurance contributions
- employee workplace pension contribution
- student loan repayments (if applicable)
- other deductions that you have agreed to or are legally required to pay
Your pay after these deductions is your take home pay (also known as ‘net pay’).
The National Insurance and pension contributions taken off your gross pay should always be employee contributions, not employer.
If you have issues with your pay, you should speak to your umbrella company first to try to sort out the problem.
If you think deductions for Income Tax and National Insurance from your gross pay are incorrect, you can estimate your Income Tax for the current year.
You can check payslip examples to see what a payslip should look like.
If you have been promised higher pay by your umbrella company
You are responsible for paying the correct amount of tax and National Insurance, even if you are employed.
Some umbrella companies promote tax avoidance which involves bending the rules of the tax system to pay less tax.
What to look out for
Your umbrella company could be involving you in a tax avoidance scheme if you get:
- a separate payment which you are told is not taxable, such as a loan
- more money paid into your bank account than is shown on your payslip
- a payment from someone other than your umbrella company, which has not been taxed
- asked to sign another agreement in addition to your employment contract
You can find out what to look for on your payslips.
Find out about tax avoidance arrangements used by some umbrella companies.
If you’re concerned you may be involved in tax avoidance
If the umbrella company makes you an offer that sounds too good to be true, take time to consider it and ask for full details. Find out more by reading personal stories from those who have been caught up in tax avoidance schemes.
You can check if you may be involved in a tax avoidance scheme by using the online risk checker tool. This tool will tell you how to report the umbrella company and get help to sort out your tax.
Get help with your pay and rights
You should discuss your pay and employment rights with your umbrella company first.
If you still have concerns after this you can contact:
- ACAS (Advisory, Conciliation and Arbitration Service)
- Citizens Advice (‘Contact us’ page)
- your trade union representative
ACAS provide free and impartial advice to employers, employees and their representatives on their rights and obligations.