So, do you know why you get a higher rate of pay when you run through an Umbrella or Limited company compared to when on a standard PAYE?
Is it a pay rise?
The simple answer is no…but I can appreciate that if you’re new to the interesting and exciting world of contracting how it might have looked that way.
Having spoken with contractors and consultants over the last 3 years, I have come to realise that there is quite a bit of confusion around this issue. If I could get back the time I’ve spent discussing this subject with confused individuals, I would probably be able to go for a nice long cruise around the Caribbean for a couple of months. I’m not sure whether this subject just doesn’t come up until the candidate speaks with a payroll provider, or whether it just doesn’t sink-in when the agency initially discusses it with them, but in this blog I’m going to shed some light on the topic and explain this “magical pay rise”.
When you work as an employee in the UK, the contributions paid to HMRC on wages are…
2/ Employers NI (hereafter referred to as NIERS)
3/ Employees NI
When a contractor is paid directly by the agency via their PAYE system, they will see deductions on their payslip relating to TAX and Employees NI. What they will not see on their payslip, however, is the amount of money that the agency is paying to HMRC in the form of NIERS. They will also not see the amount of money that the agency is putting to one side to cover the contractors holiday pay entitlement.
When a contractor is paid via an Umbrella or Limited company, the agency is no longer deemed the employer and is therefore no longer responsible for paying NIERS or generating a holiday pay fund; these responsibilities are passed over to the Umbrella or Limited company since they are now deemed the employer. In order to accommodate this, the NIERS and holiday pay amounts are tagged onto the contractors PAYE rate so that they can be passed over to the Umbrella or Limited company who will then deal with them accordingly.
So, if we look at the example in the title:
£25.17 per hour (UMB/LTD rate) is actually the hourly rate of £20.00 PAYE with £5.17 per hour added to it to cover the NIERS and holiday pay contributions that the Umbrella/Ltd Company will now be dealing with.
It really is that simple!
If this blog helps contractors or consultants get their heads around this issue, then I’m a happy man.