Understanding the umbrella company minimum rate

In line with the government increase in National Living Wage (NLW) and the National Minimum Wage (NMW) occurring in April, our minimum contract rates to pay a PAYE worker are increasing to accommodate the rise. Both the NLW and NMW will rise, with the NLW rising from £8.21 to £8.72 and the NMW rising from £7.70 to £8.20

Therefore, our minimum Umbrella rates will raise to;

£11.10 for employees over 25 £10.48 for employees 24 and under

We’re frequently asked how we calculate our Umbrella rate and whether there is any leeway, as in a highly competitive industry a single penny here and there can go a long way. However, we are also committed to compliance and ensuring that employees receive a wage that is truly fair and reflective of the employment costs that legally need to be taken into consideration.

So how is an Umbrella rate calculated?

It’s very simple. If a worker is paid PAYE by the agency, they are offered a rate of pay – let’s use the latest NLW figure of £8.72 for simplicity. However, a worker costs their employer more than the rate of pay that they see on their payslip, due to employment costs - Employer’s National Insurance, Apprenticeship levy, holiday pay, pension contributions. The agency – as the employer – has a responsibility to pass these employment costs to HMRC. Therefore, they must apply these employment costs separately into their workings as part of the reporting process.

If PAYE employment is instead undertaken by an Umbrella company, the Umbrella company becomes the employer of the worker and is therefore now responsible - as the employer – for paying the additional costs mentioned above. The amount paid to the worker must be at least the minimum wage, so therefore the contract rate paid to the Umbrella must be higher than what is offered PAYE directly via the agency. In this example – if the agency offered £8.72, we would suggest that the Umbrella rate need to be £11.10, the difference being the incorporation of the employment costs factored into the worker’s pay.

So why can some Umbrellas offer a lower minimum rate?

Firstly, check that they are compliant! There is no avoiding employment costs – ultimately, company costs need to be factored in somewhere along the supply chain. The key is that an Umbrella assignment rate will always be higher than a direct agency PAYE rate, to incorporate these costs.

Secondly, some may be omitting certain deductions, and not covering all possible scenarios – pension for example. As pension auto-enrolment is deferred for the first 12 weeks of assignment, this leads many to believe that they can therefore omit this cost they send to an Umbrella company. While this will allow for lower rates in the first 12 weeks, this is problematic for many reasons. What happens when the pension contributions begin, and how will an agency manage this? The worker will likely be taken underneath minimum wage, which is illegal. In addition, you cannot be seen to be showing that you are opting workers out of a pension prior to their enrolment – essentially depriving them of an employment benefit.

The consequences of paying workers less than the National Minimum Wage can be extremely serious. HMRC can issue a notice of underpayment, requiring payment of the arrears to affected workers and a penalty to the government. The government also periodically ‘names and shames’ companies who have underpaid workers – some previously named have been big corporations such as Wagamama, Marriott Hotels, TGI Friday’s and Shoe Zone, making headlines and causing reputational damage.

Protect your business reputation by covering all costs – use a compliant Umbrella company with a minimum rate that will cover all possible scenarios, enabling workers to be paid compliantly and fairly without taking them below the minimum wage.