Umbrella companies - Five things to watch out for in 2022/23

Not all umbrella companies present problems for workers - indeed some are well-run and take worker welfare seriously.  But you should ensure you check any arrangements carefully. 

Here are five things to watch for in 2022/23:

1. 1.25% NIC rate increase to pay for health and social care

From 6 April 2022, the rate of both employee and employer National Insurance contributions (NICs) increased by 1.25% with the introduction of the ‘Health and Social Care Levy’.

The change in employee rate means you will pay more National Insurance out of your gross pay.

The employer rate is paid by employers, but we understand from talking with sector experts that the change in employer rate may affect you as well.

Unless your umbrella company receives an increase in money from the agency or end client to pay the higher employer costs, it is likely that the increase in employer NIC will have to come out of the existing assignment rate. The assignment rate is the rate paid to the umbrella company by the agency or end client. This means they will have less money to carve your gross pay out of.

Example:

Someone starts a job in March 2022 with an assignment rate of £16 an hour. If they work 35 hours a week, this translates into gross pay for them of £440.02. The employment costs are £110.37.

Come April 2022, the assignment rate is still £16 an hour. But the employment costs are now £112.45 due to the increased employer NIC rate. This means the person’s gross pay will be £438.45.

(Figures are illustrative only) 

Umbrella companies can do this because sometimes the type of employment contract they give you means your gross pay can be flexed up and down. We explain more about this under point 4 below.

This is in addition to you then paying an extra amount in employee contributions out of your gross pay.

As we explained in our 2021 report, the legal position of this practice is unclear. However this situation is not ideal for workers.

If you find that you are receiving less money because of the increase in employer NIC, you could ask your umbrella company to try to renegotiate the overall rate with your agency or end client to account for the 1.25% increase in the umbrella company’s employer costs. This may not be possible but it is probably worth the question.

2. Missing Pension Contributions

Is your umbrella company deducting pension contributions from your wages? If so, check they are paying them over to your pension scheme. This should be on top of their employer contribution.

Under the auto enrolment regime, employees and employers should, between them, contribute 8% of ‘qualifying earnings’ to a workplace pension. You will need to allow some time for the contributions to be recorded by your pension scheme. After that if there appears to be some money missing from your pension pot, your first course of action should be to contact your umbrella company to ask what has happened.  

If your query is not resolved to your satisfaction, you should tell The Pensions Regulator (TPR) so that they can investigate. The TPR works to ensure employers meet their auto enrolment responsibilities and pay the correct pensions contributions into the scheme on behalf of their staff. It can penalise employers if they fail to do this.

3. Topping up basic pay with non-taxable payments

If your umbrella company is paying you a minimum wage amount but then also giving you another payment like a loan, grant, bonus advance, expenses etc. separately to top up your wages, they may be operating a disguised remuneration (DR) scheme. If it is a disguised remuneration scheme the company will say that the top-up is not taxable. This is tax avoidance. You can read more about why they may be doing this and what you can do about it in our article here.

4. Non-payment of wages

Is your umbrella company not paying you at the correct rate? We have recently been contacted by someone who works for an umbrella company who were only paying the national minimum wage (NMW) and not the much higher hourly rate that they were expecting (that is, the going rate for her role).

As we set out in our 2021 report, most umbrella companies structure people’s pay in the form of a minimum wage element and a (taxable) ‘discretionary’ bonus element to make up the wage to match the value of the work. If your umbrella company does this, it should be set out in your employment contract. This is to help protect the umbrella company in the event of non-payment by the agency or end client. It is our understanding though, that in the vast majority of cases, the ‘discretionary’ bonus element is routinely paid and is taxed as normal pay.

However in this case, no discretionary bonus was paid. The extra money they were expecting simply didn’t arrive.

If this has happened, you should first ask the umbrella company for an explanation as to the non-payment. If they say this is because the agency or end client has defaulted on paying them, then you should check this with the agency or end client. This will help you to get more information about the circumstances, which will then help you to decide your next steps.

If there is no reasonable explanation, then you should seek some advice from ACAS as to whether non-payment could count as an unauthorised deduction from wages. If the matter cannot be resolved, you may be entitled to make a claim to an employment tribunal. 

5. Growth share schemes

A growth share scheme is where an employer offers employees a share in the capital growth of the company. Growth schemes are usually used to help attract and retain the best people. They bring together the interests of the employer and employees by giving employees a sense of ownership of the company.

We are aware of a recent case where an umbrella company employee was offered a NMW salary (generating a small amount of tax and NIC) with the remaining amount transferred into a growth share scheme. The person involved was told that any proceeds will be taxed as capital in their hands, which enables the use of their Capital Gains Tax (CGT) annual exemption, and the lower rates of CGT. This results in them paying less tax than if they were just given normal employment income.

A growth share scheme, if set up and dealt with in the right way, can be a legitimate way of incentivising employees to help stimulate growth in certain companies. However, it is hard to see how this might work in the context of umbrella companies, where the characteristics of the underlying business are different and there is no real commercial rationale. If the reason for the growth share scheme is simply to avoid giving you normal taxable employment income, it is possible HMRC will say this is tax avoidance.  

Contribute to our work on umbrella companies

The government published a call for evidence in December 2021 asking for up-to-date information about how umbrella companies operate. We responded to the call for evidence setting out some issues that we think they should be aware of in the sector, such as around retention of holiday pay. Our response was an update on developments in the umbrella company marketplace since the publication of our ‘umbrella’ report in 2021. 

If you are in an umbrella arrangement that you do not understand or that seems different to what we have covered in our 2021 report, our call for evidence or in this article, please let us know, as this will help us monitor the situation and will be very useful to feed into our work.

More information

For more information on working through an umbrella company and, in particular, finding a compliant one, see our website guidance and factsheet (recently updated for 2022/23 changes).