Empowering the Freelance Economy

Umbrella company workers slammed again

Umbrella companies will be the worse off of independent workers/ Photo Source: Photo by Bali Demiri from Pexels
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The Chancellor and Prime Minister have confirmed that the National Insurance rise will go ahead this April – a move that freelancers, contractors and their fellow small business owners know will hit them hard in the midst of a cost of living crisis. Umbrella company workers, many of which were forced inside IR35 since April 2021, will be especally out of pocket by a spree of tax hikes, umbrella company cyberattacks, subsequent late payments and the threat of hidden tax avoidance.

Seb Maley, CEO of IR35 insurance company Qdos warned the self-employed and umbrella company workers that it’s crucial that they understand that this isn’t simply a 1.25% increase to NICs – the reform will see those impacted pay 1.25p more on the pound.

“So for simplicity of maths, it means self-employed people who pay £1000 NIC for 2021/22, will see this bill creep up to £1250 in 2022/23,” says Maley.

Maley continues:

And given this rise applies to employers’ and employees’ NICs, umbrella workers – who pay both – are set to bear most of the brunt of this reform.


“It’s also worth pointing out that contractors haven’t gotten off lightly either,” he says.

“As part of the Social Care Levy, dividend taxation is set to change again, rising by 1.25%. This is in addition to a Corporation Tax rise in 2023. 

You might argue that tax increases were inevitable in light of the pandemic. But given millions of self-employed people – sole traders and limited company contractors – didn’t qualify for Covid support.”

Maley says when all the factors are added up it begs the question: “Is it fair that the smallest businesses are set to be hit hardest?”

I support paying tax where we get value as taxpayers or the government is providing essential services. But this money sounds like it is going to disappear into a black hole. Especially when we hear that this money will in fact go to the NHS (not social care) who are hiring no less than 42 new CEOs on £270k plus salaries per year.

Michael Oszmann, founder of Buy Britain

How will the government use the extra NI contributions?

According to the 2022 Up-rating report, the government has stated that as a result of the Health and Social Care Levy Act 2021, for the 2022 to 2023 financial year there will be a “temporary” 1.25% rise in National Insurance contributions to raise money for the NHS.

“Due to the way the calculation is performed, the extra amount paid to the NHS will be around £2.9 billion higher than the extra contributions collected. This means the NIF will lose this income in that financial year. This effect on the NIF will stop once a dedicated levy is introduced from April 2023,” said the report.

The government shouldn’t be tightening its grip on our finances at a time like this.

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown.

How can contractors trust their umbrella companies again?

Umbrella company workers will be counting their every penny come payday in February following a spree of January cyberattacks on big-name umbrella company outfits (and their subsidiaries) and pending tax rises. But unlike other PAYE workers, those employed by an umbrella company must be vigilant when it comes to ensuring their reported tax contributions are actually going to the HMRC and not back into the pockets of their umbrella company in some offshore account. Any other company found guilty of skimming employee tax payments would be done for fraud. But somehow, there seem to be more reports of umbrella companies getting away with criminal practices since Off-Payroll rules were put in place, welcoming a surge in new umbrella company outfits to set up shop.

Yet, until HMRC focus their investigative efforts more on umbrella companies, rather than individuals that use their services, there will always be a cloud of doubt hanging over umbrella company workers. Contractor concerns will only be exacerbated if they saw just how interconnected the big brand umbrella company sector ownership structure is. And how a myriad of related offshore shell companies operating outside of UK jurisdiction could make it very difficult for HMRC to tackle.

UPDATE:

It would seem the situation of ransomware attacks on umbrella companies in the UK has worsened. There has been confirmation that there is a high likelihood that personal data of umbrella company workers have been leaked.

So, what can a contractor do? One way they can prove that their umbrella company is above board is to compare the amount of tax they paid through their personal HMRC account and what the umbrella company has posted to HMRC on the contractor’s behalf. If there is a discrepancy then the contractor, not the umbrella, could be caught out by tax avoidance if the contractor does not bring this to the attention of their accountant. An accountant can get in touch with the umbrella company to learn more about the discrepancies and even ask for evidence, which could help create a paper trail. If you find yourself in such a predicament, it is advised that you also contact IPSE and an IR35 insurer that has had dealings with the government for their initial feedback about your situation.

The FCSA, which accredits umbrella companies, which to this day are unregulated, has made the following observations on the criminal element that exists in the umbrella company sector, which was in response to a call for evidence on Off-Payroll practices by the House of Lords Finance Bill Sub-Committee:

  • The criminal element that exists within the sector no longer recognises borders and so it is becoming increasingly difficult to identify and prosecute the individuals behind these schemes and remote, cloud based, or dark web IT systems make this task even more challenging for prosecuting bodies.
  • FCSA very much welcome proposed regulation into the sector, having campaigned for it for over ten years. But we are concerned that it will only seek to define regulation around the umbrella model.  We have always warned against this because we operate in a marketplace that is constantly evolving and developing new operating models. We cannot predict the future and so do not know how the market will operate in say three years.
  • We have therefore recommended to colleagues at BEIS that regulation be based around ‘outsourced worker models’ rather than just umbrella in order to provide universal protection to contractors regardless of the delivery model under which they work.  This would give any future regulation an element of future proofing.

3 Comments
  1. Simon says

    I’m just wondering about Mr Maley’s calculation.

    “So for simplicity of maths, it means self-employed people who pay £1000 NIC for 2021/22, will see this bill creep up to £1250 in 2022/23,”

    Both self employed and umbrella company employees are referenced in the surrounding text but the 25% increase in NICs given in the example looks too high for either case.

    I calculate approximately:

    Sole trader 10.25% / 9% = 13.8% NIC rise

    Umbrella employee 28.3% / 25.8% = 9.7% NIC rise

    So depending on which the example refers to, rather than £1250, the increased NICs should be either £1138 sole) or £1097 (umbrella) which should be considered in the context of the umbrella employee suffering a far higher rate of NICs than a sole trader.

    Or am I wrong?

    1. Katherine Steiner-Dicks says

      It is my understanding that an umbrella company worker will always pay more NICs than a sole trader. Limited company freelancers will also eventually be hit with higher dividend taxes and those that choose to work inside IR35 for any projects, will be paying more than all freelancers/contractors combined as they will be hit with high NICs and other taxes, plus umbrella company fees. And if they are not on top of claiming their umbrella company holiday pay, they could also lose £££s.

      But for any of our accounting experts out there, please could you address Simon’s question in mathematical terms? As I am sure many freelancers are looking at company structure options in light of Off-Payroll reforms.

      1. Simon says

        Absolutely right Katherine and thank you for your prompt reply 🙂

        I just mentioned this disparity at the end of my comment about the maths so it was clear that despite the percentage increase in NI being less for umbrella company employees, this is only because they are paying so much more NI than sole traders in the first place.

        To be honest I think there are multiple inequities in the UK NIC set up and poorly thought out crude measures such as this latest 1.25 percentage point increase are a good illustration of just how unfair the system can be.

        Personally I am still using a limited company as a vehicle for my work but with the various recent changes – off payroll and Brexit in particular I am really wondering about the best approach. Currently I have a European contract but have been working off site for the last couple of years. Now there is talk of returning but when I look at what our government has done for contractors in this respect – it’s a big fat nothing!

        Unsurprisingly we are now in a very similar position to EU citizens who wish to work in Britain, requiring to jump through hoops to get work permits and thus being disadvantaged when compared to those with EU passports. If the government was really setting out to crush the industry – the IR35 changes plus Brexit seems a great start!

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