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Assignment rate unravelled: questions to ask before you accept an off-payroll job

Umbrella workers need to approach an assignment rate like a ball of yarn: unravel it to see how much you have to work with
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If you are starting your contracting journey in 2024 or deciding to take an off-payroll job especially one that the recruitment agency insists you work via an umbrella company, then there are some crucial things you need to understand before accepting a contract: what is included in an assignment rate

When a client determines a role as “Inside IR35” under the off-payroll rules that means two things, the worker contracts through their own limited company or an intermediary (i.e. a partnership much like sports commentator Gary Lineker used) and the nature of the job is “deemed employment.” However, in this article, we are focused on limited company contractors.

In some cases, an advert may describe a job as being ‘Inside IR35’. This means that the engagement isn’t being offered “Outside IR35” and therefore the client (or recruitment agency) may ask you to be employed through an umbrella company.

One of the easiest ways to get your head around all this “inside and outside IR35” job advert lingo is to understand that IR35 and/or Off-Payroll doesn’t even come into the equation if the role is Agency PAYE or Umbrella PAYE. When an advert says a role is “inside IR35” it’s just a clumsy way for an agency to say you will not be paid on a gross payment basis.

The word IR35 can be used in a job advert the following ways, for example:

  • “This engagement is considered Inside IR35 for contractors working via limited companies.”
  • “This engagement is considered Outside IR35 for contractors working via limited companies.”

Otherwise, the advert should say:

  • “This engagement is offered either via agency payroll or umbrella company.”

Despite numerous and continuing cases of tax avoidance schemes linked to unethical umbrella companies, when you find a legitimate umbrella company, it can offer certain benefits. That said, navigating the terms can be tricky and can have inherent risks. One key concept that often throws contractors for a loop is the “assignment rate.”

Contractors should look at an assignment rate like a ball of yarn. Fully unravel it because you don’t get the whole ball of yarn when it comes to the assignment rate. It’s much less.

But here is why things get confusing.

There are many different rates or types of assignments:

  • PSC, Outside IR35
  • PSC, Inside IR35
  • Agency – the rate is a PAYE rate
  • Umbrella (assignment rate)
  • Umbrella (Professional Employment Organisation/PEO) – the rate is a PAYE rate

To clear the air on what an umbrella assignment rate will include, we’ve posed crucial questions to off-payroll experts and seasoned contractors. Here’s what they have shared.

Employer contribution: Who pays?

The short answer: It’s not quite as straightforward. All employers must pay employers national insurance, and it is unlawful to deduct this from a worker’s income. Yet, you will see these costs in an “assignment rate,” which we explain below.

The assignment rate is often the rate that gets the contractor’s initial attention. Then the contractor finds out that they won’t be paid that rate since it includes umbrella company fees and employer’s national insurance costs that are factored in for the end client/hiring company to pay. Even the Apprentice Levy.

If you are working through an umbrella company they are liable to pay the employers’ national insurance (NI), not you the contractor. Umbrella companies need to add these NI costs into their fees to the agency and ultimately the client who effectively would be paying for them if the intermediary, the umbrella company, was not in the equation. The client or agency would also be paying them if the worker continued to use their limited company on an “Inside IR35” basis.

“The “assignment rate” is a made-up work of fiction with no statutory basis,” says Dave Chaplin, an IR35 specialist and CEO of IR35 Shield.

“It’s the route whereby all the schemes, scams, skims, operate, he says. “It would be much easier for the rate quoted to be a standard PAYE rate like the agencies quote when someone is on agency payroll. To highlight the silliness, there’s no such thing as an assignment salary.”

While a very complicated matter, “off-payroll” and “IR35” both deal with deemed employment and use the same tests for assessing status, explains Chaplin. Both mean a personal service company [i.e. limited company] is involved. When a contractor is hired for an “Inside IR35” role, that means using a limited company, but it also means the role is classified as “deemed employment”.

Now, on the other hand, an umbrella worker is an “on-payroll-only worker”.

Chaplin says, “Agencies are using the phrase ‘this is inside IR35 so you must use an umbrella’, which is legally incorrect. “Inside IR35″ does not mean someone must be put on a payroll. On-payroll means employed, either as an employee of a firm, an agency worker or employed via an umbrella.”

Chaplin believes the complication is unnecessary. He suggests a simple solution whereby agencies advertise roles as “on-payroll” only, or “umbrella only”, and never mention the words “because this is inside IR35”. Why? “Because (a) it’s legally untrue, and (b) it opens the door to schemes.”

The assignment rate you agree with your umbrella company is designed to cover all employment costs associated with your contract, including the employer’s National Insurance Contributions (NICs), the Apprenticeship Levy, the 3% pension contribution, and the umbrella’s own margin. This means the employer contribution is already factored into the “assignment” rate.

“The fee that the client pays should have been calculated to include the percentage of employer contribution. So, that percentage has to come out of the rate paid from the client by the recruitment company to the umbrella company,” according to Rebecca Seeley Harris, an expert in Independent Employment Status and Off-payroll working.

She continues, “So, the assignment rate should include all costs and those costs are then deducted. So, if you follow the trail backwards effectively the client is paying.

“The problem seems to occur in the communication of what the assignment rate is for. It is very often used to entice the contractor without proper explanation of the costs that have to be deducted,” says Seeley Harris.

An assignment rate is not what contractors end up getting paid, but just a fraction of it. That is why is causes so much confusion and rate negotiation with the recruitment agency so you are not out of pocket.
Photo by Oladimeji Ajegbile via Pexels

The “assignment rate” is a made-up work of fiction with no statutory basis.

Dave Chaplin, IR35 specialist and CEO of IR35 Shield

Key questions to ask before you accept an off-payroll job

Sham Bhangal, a contract developer working in the telecoms and mobile sector says once you ask a few questions when considering an off-payroll job you can determine if the rate is worth it. While the assignment rate is very confusing he explains how it works:

“Everything is deducted from the day rate or doesn’t exist. So, expect NI plus the apprenticeship levy to be deducted. Holiday and employer pension contributions are often ‘optional’ (zero by default, you pay for them out of the day rate if you want them).”

He says this process is “entirely illegal, but easy to query and say ‘no’ when you realise the true rate.”

Fire off those questions in an email. Most recruiters will realise their answer will form part of the contract if it ever comes to a claim down the line. Vagueness equals ‘no thanks’.

Sham Bhangal, Contract Developer, React at Vodafone


  • Is NI coming out of the day rate?
  • How are holidays handled? If I take none, what do you deduct?
  • Will you be opening a pension for me during this contract?

“Fire off those questions in an email. Most recruiters will realise their answer will form part of the contract if it ever comes to a claim down the line. Vagueness equals ‘no thanks’, says Bhangal.

Clarifying rates

Compliant umbrella companies understand the difference between the “assignment rate” (a bundled rate including NI, holiday pay, and other employer costs) and the worker’s actual “gross pay.” Clear explanations to umbrella employees are crucial to avoid confusion and ensure awareness of their employment rights and benefits.

Bhangal suggests you make sure you can live day-to-day on £50,000, otherwise, he says, “that first payslip will look emaciated compared to an outside gig or one of the better staff jobs.”

Inherent risks when forced to go through umbrella companies

One would presume if the recruitment company and umbrella company are responsible for organising payments for employer taxes and the 3% pension contribution why would a contractor being paid through an umbrella company ever be penalised for unpaid national insurance employer taxes, i.e., tax avoidance?

According to Seeley Harris, “If the umbrella company scheme is [conducting a form of] tax avoidance they will not be paying the appropriate tax. Sometimes this is down to the umbrella company depending on what the scam is but, in other cases, it is down to the worker to establish whether they are paying appropriate taxes. If it looks too good to be true, it probably is!”

James Brown, a Health and Safety Consultant and Interim Manager says, “The most frustrating thing with all this is that most limited company contractors hired professional chartered accountants to keep them right and to ensure they paid the correct taxes each year – now perversely the 2021 IR35 reforms have forced many into these unregulated “umbrella” arrangements, so they have lost control of their tax affairs and some have unwitting become “tax dodgers” without even knowing it.”

Umbrella red flags for tax avoidance schemes

  • If a middleman handles the payment in this transaction
  • If the umbrella company promises higher earnings retention compared to other options
  • If you’re presented with an agreement like an annuity, loan, or other contract involving a tax-exempt portion of your income

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What’s included in the Assignment Rate via an umbrella?

Think of the assignment rate as a bundled package covering all your employment costs.

It should include:

  • Your day rate: This is the hourly or daily rate you negotiate for your services. Ensure you can live on this. It will be taxed at the PAYE tax rate based on your gross pay.
  • Employer NICs: The employer’s portion of National Insurance contributions.
  • Apprenticeship Levy: A levy paid by larger employers to fund apprenticeships.
  • 3% Employer Pension Contribution: The minimum legal contribution employers must make to their workplace pension scheme. However, one contractor asked the experts what to do in the case of escalation routes where the stated ER Pension deduction from the “assignment rate” exceeds what the Agency is paying (due to the Government’s Qualifying Earnings max threshold). Dave Chaplin suggests if you have issues with an employer (i.e. recruitment agency, umbrella company or end client/hiring company) then your first point of call should be ACAS or Employment Agency Standards Inspectorate (EAS)
  • Umbrella Company and Recruitment Agency Margin: The fee the umbrella company charges for its services, typically a percentage of your day rate. The recruitment agency will also need to add their fee to the assignment rate.
  • Administration costs (e.g. the margin, which is sometimes charged separately to you by the umbrella company)
  • Holiday Pay (if accrued): If you’re entitled to holiday pay under your contract, it’s also factored into the assignment rate.
  • Statutory rights as an umbrella company worker: According to the FCSA: “Contractors working for an umbrella firm are by definition employed by that umbrella firm, and therefore have access to all statutory rights and benefits of employment. This includes annual leave, maternity, paternity, sick pay and pension contributions, and all of these rights are provided for by the umbrella firm.” But unlike most employers, umbrella companies try to include these costs in their fees to end clients through the “assignment rate”. That is what makes working through an umbrella tricky, despite the FCSA saying otherwise.

Umbrellas also retain a small margin to cover their costs for the services they provide. This is also deducted from the assignment income, and the balance is the workers’ gross pay. The Agency Workers Regulations 2010 provide that umbrella employees receive at least equivalent rights to their full time equivalents, including pay. This means that the assignment rate must usually be greater than the rate which the equivalent employees of the recruitment agency or hirer receive in order to achieve that.

After you request from the recruitment agency and umbrella company the breakdown of the assignment rate you will be better informed as to how much your gross pay will be and if the assignment is worth taking/ Photo by Tima Miroshnichenko via Pexels

What does an off-payroll assignment rate include?

Contractors that work off-payroll and “inside IR35” under the new rules for a medium or large company and bill through their limited company (their personal service company or “intermediary”) are working through “deemed employment“. This means they and the end client they work for pay the same tax on the gross invoice paid to the PSC as if the contractor were an employee. Yet the contractor does not get benefits, such as sick pay, holiday or pension contributions.

The effect of putting the contractor into an umbrella is to revert back to the old rules, where the contractor is paying the client’s NI bill.”

Dave Chaplin, CEO IR35 Shield

“The money paid to the contractor’s limited company must be treated as earnings from employment,” explains Chaplin. “This means it is taxed just like a salary. The deemed employer then pays the employment taxes on top – they cannot be deducted.”

He adds, “It is worth noting that under the old rules, the calculation was different, whereby the contractor did pay the client’s NI bill, but under the new rules, the NI is paid on top. The effect of putting the contractor into an umbrella is to revert back to the old rules, where the contractor is paying the client’s NI bill.”

Who foots the bill?

Ultimately, you, the contractor, could end up bearing the cost of the 3% employer contribution if you do not ask the recruitment agency to negotiate with the client to increase the “contractor rate” to absorb these costs. Remember, the assignment rate you agree to is designed to cover all employment expenses, including the 3%.

However, the umbrella company’s responsibility is to take care of calculating and deducting these costs from your pay and handles all the admin associated with payroll and taxes. This can be a significant benefit for contractors who want to avoid the complexities of self-employment accounting. You just have to keep on top of this. If you start to see discrepancies on your payslips bring this up immediately to the umbrella company. If they are vague in any way, bring your concerns up with HMRC so they can go to the umbrella company directly if they suspect they are pocketing your national insurance contributions or skimming in any way your gross pay rather than paying HMRC.

The HMRC guidance unequivocally states that agencies must accurately calculate and convey pay rates to reflect actual costs and margins. All too often, agencies only advertise the basic salary rate to workers rather than the full rate, leaving employees confused about their take-home pay.

Crawford Temple, CEO of Professional Passport

Information is power

The assignment rate might seem confusing at first, but understanding its components empowers you as a contractor. Contractors have however asked for higher day rates through their agencies so they are not out of pocket. Will you always get what you ask? That will depend on how much in demand your experience and skill levels are. If you don’t negotiate then you will never know. Before you even negotiate, however, ask your recruitment agency and umbrella company for a clear breakdown of your assignment rate to ensure transparency and make informed decisions.

Bonus Tip: Before committing to an umbrella company, research and compare rates and services offered by different providers. Use this as a bargaining chip. If you are being forced to go through an umbrella company and you already feel comfortable with another, then ask the agency if they will reconsider. Ensure you’re comfortable with the fees and the level of service you’ll receive. Ask around on social media and news archives to see what real contractors have to say.

Have a question about umbrella companies and assignment rates?

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What’s HMRC’s guidance about umbrella companies?

Crawford Temple, CEO of Professional Passport says “The [HMRC] guidance unequivocally states that agencies must accurately calculate and convey pay rates to reflect actual costs and margins. All too often, agencies only advertise the basic salary rate to workers rather than the full rate, leaving employees confused about their take-home pay. Going forward, agencies must clearly spell out the gross salary, employment expenses, umbrella fees, and ultimate net wage the worker will receive through the Key Information Document. The total gross rate remitted to the umbrella company is dubbed the “assignment rate” and must form the basis for pay discussions with workers.”

No KIDs? No Thank you

Temple says Key Information Documents (KIDs) have been a legal requirement since April 2020 and were intended to be an important step towards greater transparency on the working terms between the contractor and hirer. Contractors should always insist on receiving a KID from any agency before the start of an assignment so all employment and pay parameters are completely clear.

“The legally required Key Information Document (KID) must offer clear specifics around proposed wages, fees, deductions, taxes and net pay, not boilerplate templates,” he says.

“Firstly, at registration, the agency should furnish a worker with sample KIDs using a generic rate so contractors understand all potential payment scenarios. Additionally, once an assignment is confirmed, an updated KID must spell out vital details:

  • The Contract Rate – The exact specifics for that particular assignment
  • Deductions – The KID must list any statutory deductions like income tax plus any non-statutory deductions and fees like the umbrella margin. Either the precise amounts or the formula used to calculate deductions should be shown. 
  • Holiday Pay – Exactly how holiday pay entitlements are determined and calculated.
  • Representative Example – A sample payslip with realistic numbers demonstrating the application of the listed deductions.
  • Updates – Whenever a ‘Material Change’ occurs an updated KID must be issued to the contractor within 5 working days. A change in rate is not considered a material change but where new deductions are applying, such as Pension Auto Enrolment, an update is merited.

You can learn more about what HMRC has recently issued on new guidance along with other points on working through an umbrella 

  1. Johnny Sausage says

    So complicated! Even in Germany it is much easier.

  2. Greg Horne says

    This article shows just how poor the whole experience is for most contractors and agencies. Here’s what we do. We take the charge rate (to us, the agency) and work backwards. Charge (what we get) Umbrella Rate (what we will pay to the Umbrella) the Umbrella and then the individual contractors rate. The umbrella then creates a detailed KID which we issue to the contractor which gives them a complete breakdown including his/her gross and net rates illustrations and what all the “upper charges” are coming out of the umbrella rate. It’s not rocket science but it is a pain in the arse for everyone. Keep IR35 out of it. It’s the blanket ban on using PSC’s that HMRC said there was no evidence of. Strange how there is never a CEST or IR35 status test of any sort delivered with the role.

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