Umbrella Rate versus Day Rate

[fireseeker]

First post, and first time with a contract in hand and ready to sign through an umbrella. The umbrella is dictated by the client, the umbrella is a respectable firm and without going into details the reason for this is sound.

I told the agency to put me forward for my day rate of X and having had two interviews I was given a verbal offer. The contract has taken a while because I needed non-exclusive terms so I can do work on the side through my (currently non-trading & never traded) limited company. I have both an umbrella contract and client contract to sign, there is also an assignment schedule.

First question is, what does a KID look that? Does it have a standard format, if so can someone point me to a sample or template? I am assuming it is meant to actually say Key Information Document at the top? I have had an illustration from the agent that looks like the output of one of the umbrella calculators, eg the Giant one, but it doesn't look very KID-like to my inexperienced eyes - not much else from them though.

Secondly, having scoured these forums I have found that according to HMRC the cost of employment cannot be deducted from my day rate. In short, it appears that the agency has represented my day rate X as the umbrella/assignement rate to the client and now the client is stating in the contract that the costs of employment will be deducted from day rate X - ie Employer NIC, margin and Apprenticeship Levy.

What's the best approach here? My instinct was to goto the Agent first, but they have referred me to the umbrella, which feels like palming me off. Escalate up the chain at the agency? Complaining to the client feels like exactly the wrong thing to do. Then there's the umbrella, is there any point bringing this up with them?

My understanding is that the umbrella/assignment rate is charged to the client by the agency (including cost of employment and my day rate) and then I get my day rate of X. Obviously this has happened here.

This is the gov page that a fellow poster shared:

https://www.gov.uk/guidance/working-...brella-company

"An umbrella company cannot by law deduct employer National Insurance contributions from your gross pay."


Any advice for a contracting newbie?

Cheers

fireseeker

[eek]

First post, and first time with a contract in hand and ready to sign through an umbrella. The umbrella is dictated by the client, the umbrella is a respectable firm and without going into details the reason for this is sound.

I told the agency to put me forward for my day rate of X and having had two interviews I was given a verbal offer. The contract has taken a while because I needed non-exclusive terms so I can do work on the side through my (currently non-trading & never traded) limited company. I have both an umbrella contract and client contract to sign, there is also an assignment schedule.

First question is, what does a KID look that? Does it have a standard format, if so can someone point me to a sample or template? I am assuming it is meant to actually say Key Information Document at the top? I have had an illustration from the agent that looks like the output of one of the umbrella calculators, eg the Giant one, but it doesn't look very KID-like to my inexperienced eyes - not much else from them though.

Secondly, having scoured these forums I have found that according to HMRC the cost of employment cannot be deducted from my day rate. In short, it appears that the agency has represented my day rate X as the umbrella/assignement rate to the client and now the client is stating in the contract that the costs of employment will be deducted from day rate X - ie Employer NIC, margin and Apprenticeship Levy.

What's the best approach here? My instinct was to goto the Agent first, but they have referred me to the umbrella, which feels like palming me off. Escalate up the chain at the agency? Complaining to the client feels like exactly the wrong thing to do. Then there's the umbrella, is there any point bringing this up with them?

My understanding is that the umbrella/assignment rate is charged to the client by the agency (including cost of employment and my day rate) and then I get my day rate of X. Obviously this has happened here.

This is the gov page that a fellow poster shared:

https://www.gov.uk/guidance/working-...brella-company

"An umbrella company cannot by law deduct employer National Insurance contributions from your gross pay."


Any advice for a contracting newbie?

Cheers

fireseeker

Don't know where you got that idea from - the umbrella rate / assignment rate (which is what you are calling your day rate) will always be the biggest possible figure before all deductions because agencies love advertising the biggest figure possible and the ASA don't understand the issue enough to care or deal with it (mainly because they don't want anything to do with job adverts even though it's in their remit due to crap legislation). Gross Pay is something very different as I will show below.

Assignment fee = full payment to the agency less their margin.
From that you need to deduct the following to get to gross pay

• Holiday pay (12.07% unless it's in a school at which point it's more complex and depending on a Supreme court decision)*
• All Employer employment costs (Employer NI @ 15.05%, Apprenticeship levy @0.5%, Employer Pension contribution at 3%)
• Umbrella margin

* Holiday pay can often be ignored because ideally it will be paid in advance but I highlight it here because legally it needs to be deducted and paid as you take holiday.

Whatever is left after the deductions above is your Gross Pay for tax purposes which would also be the PAYE rate if the agency was offering to do PAYE or were being honest and advertising a PAYE rate in the way that more honest agencies work / used to work. (worth adding here that a day rate isn't actually a sane advertising model because the minimum wage is based on an hourly rate so a quick test to what is being advertised - Hourly rate (below about £20 an hour) usually PAYE after employment cost deductions, day rate (or hourly rate above £20 an hour) usually top level figure before any deductions).

As for the KID - there isn't a standardised format and they are so abused they are almost worthless but they are there to show you 2 things

1) to act as a comparator for take home pay between PAYE, umbrella and Limited Company (depending on the options available)
2) the basis of the payment, what deductions need to be made and how your gross pay is calculated (if umbrella / assignment fees are being advertised) - the fact you have been given a KID shows you know how your pay is being calculated so your argument regarding illegal deductions wouldn't get far at a tribunal.

Finally, 2 points

1) umbrella rates are great if you are planning to put a lot into your pension - if you aren't Agency payroll will save you the umbrella costs but a lot of agencies don't like running payroll.

2) you say the client is insisting on a particular umbrella (is that the end client or the agency?) In either case if they are insisting on your using a single umbrella firm that to me screams abuse as you should have a choice of umbrellas and you shouldn't be being forced to pay an company a fee to be paid).

[malvolio]

Just to add, if you don't like the money on offer, walk away and try somewhere else. Although next time you will know what you are looking at.

[fireseeker]

eek Thanks for your comprehensive breakdown, that's made the position clear. Regarding the mandatory umbrella company (stipulated by the client), I'm having a solicitor check the contract to make sure I can still do other work outside client hours so I will raise this point with them.

I am looking to put everything except NMW into a pension through salary sacrifice. However, I can't find an umbrella calculator online that will allow the large pension payments I am going to make. The amount is in excess of £10000 per month, I have carry forward to use from previous tax years so I can exceed £40000 annual contribution. The calculators that allow pension to be specified and are easy to use (that I have found), Giant and Orange Genie, assume a max contribution of £40000 / 12 and won't calculate for higher than this. I am going to go max sacrifice for 4 months and then 2 months with no sacrifice - the umbrella has already confirmed they can sacrifice to my SIPP and can flex the payments through the contract.

Can you point me to a calculator that allows for high salary sacrifice to be entered and doesn't assume that the high level is going to continue for an entire 6 month period? Really all I want is the position for 1 month at differing salary sacrifice amounts that are 5 figures and then I can do the rest.

malvolio Absolutely, it's good money I just want to make sure I don't make any silly mistakes or don't ask the right questions especially as this is my first contract.

[Protagoras]

I am looking to put everything except NMW into a pension through salary sacrifice. However, I can't find an umbrella calculator online that will allow the large pension payments I am going to make.

I was also unable to find such a calculator a few months ago, and ended up calculating this myself.

I also asked a couple of umbrella companies for illustrations, to verify my calculations - why not ask the umbrella company for an illustration?

I also worked it out in Excel based on

Pension Contribution = (day rate * days worked) - Apprentice Levy - Umbrella Margin - Employer's NI - Employee's NI - PAYE taxes - (hours worked * NMW)

I calculated this over a month, with holiday pay included in the rate. You'd need to allow for the employee NI change in July.

[eek]

Can you point me to a calculator that allows for high salary sacrifice to be entered and doesn't assume that the high level is going to continue for an entire 6 month period? Really all I want is the position for 1 month at differing salary sacrifice amounts that are 5 figures and then I can do the rest.

.

You will have to write your own in Excel. Even the payroll buddy / SafeRec one doesn't do what you want.

But the reality is you can completely ignore it. The first 4 months are simple - your salary will be £1400 or so a month due to minimum wage and the standard calculator will give you the figures for months 5 and 6 once you've hit your pension limits.

[eek]

I was also unable to find such a calculator a few months ago, and ended up calculating this myself.

I also asked a couple of umbrella companies for illustrations, to verify my calculations - why not ask the umbrella company for an illustration?

I also worked it out in Excel based on

Pension Contribution = (day rate * days worked) - Apprentice Levy - Umbrella Margin - Employer's NI - Employees NI - PAYE taxes - (hours worked * NMW)

I calculated this over a month, with holiday pay included in the rate. You'd need to allow for the employee NI change in July.

That's wrong - Salary sacrifice should be everything except Umbrella margin and the amount required to pay you the minimum wage.

No Apprenticeship levy or employer NI should be coming from the pension contribution. I don't have the figure required to pay the minimum wage to hand but it's something around £12 an hour so the calculation should be

Pension Contribution = (day rate * days worked) - - Umbrella Margin - (hours worked * 12)

[Protagoras]

That's wrong - Salary sacrifice should be everything except Umbrella margin and the amount required to pay you the minimum wage.

No Apprenticeship levy or employer NI should be coming from the pension contribution. I don't have the figure required to pay the minimum wage to hand but it's something around (and below) £12 an hour so the calculation should be

Pension Contribution = (day rate * days worked) - - Umbrella Margin - (hours worked * 12)

Is it the way I wrote the sum? There's no deductions from pension contribution for NI etc, but they do need to be covered, don't they?

To express differently, my calculation is

Pension Contribution = (day rate * days worked) - employment costs - umbrella margin
(i.e. what's left for the brolly to put in to pension)

where employment costs = (hours worked * NMW) + employer's NI + employee's NI + PAYE taxes + apprentice levy

As an adult worker, NMW is currently £9.50 / hr

[eek]

Is it the way I wrote the sum? There's no deductions from pension contribution for NI etc, but they do need to be covered, don't they?

To express differently, my calculation is

Pension Contribution = (day rate * days worked) - employment costs - umbrella margin
(i.e. what's left for the brolly to put in to pension)

where employment costs = (hours worked * NMW) + employer's NI + employee's NI + PAYE taxes + apprentice levy

As an adult worker, NMW is currently £9.50 / hr

Yep it was just the way you wrote the sum but it's also still wrong

Employment costs = (hours worked * NMW) + money retained for holiday pay + employer's NI + apprenticeship levy (if appropriate).

The employee NI and PAYE taxes come out of the NMW.

Now NMW is £9.50 but you also need to factor in holiday pay at 12.07% -> £10.64 then employer NI at 15.55% will take that to about £12 or so.

[Protagoras]

Yep it was just the way you wrote the sum but it's also still wrong

I did say "I calculated this over a month, with holiday pay included in the rate"

So in my calculation I was not allowing for funds put aside for holiday pay. You've got me thinking about that one - I need to have another look at the detail of this point.

My calculation doesn't factor take-home pay, but yes, clearly employee taxes come from that.