Agencies slash PSCs' pay rates, insist on umbrellas

PSCs are being blocked from staying as ‘Ltd’ companies and applying IR35 because agencies and public bodies want to head off hassle next month of assessing status and withholding tax.

Ultimatums are therefore being sent to such PSCs before April 6th, in essence saying ‘convert to a PAYE umbrella, ignore the less-taxing model of being a PSC inside IR35, or be out of work.’

“The best option for [you/a PSC], with regard to take-home pay, and us [the agency], from an admin and compliance perspective, is for [you/the PSC] to use an umbrella company.

“Therefore, going forward [our agency] will only be able to contract with you through an umbrella company,” a staffing agency instructs, in an email sent to PSCs at public gigs.

New deductions

Helping to convince PSCs to switch to brollies is the threat of cuts to PSCs' pay, which agents are relaying in a bid to cover the costs the agency faces from a combination of employer National Insurance and the Apprenticeship Levy.

Contractors are being warned they will suffer these pay cuts (on top of PAYE) if they stay a PSC and are decided inside IR35.   

These cuts are being calculated by agents taking the original PSC's pay and shaving it by 12.1% -- an approximation agents are starting with to cover standard monthly employer NI.

Although standard monthly employer NI stands at a seemingly bigger percentage -- 13.8% -- it is this percentage that will be deducted from the PSC's (already cut) pay.

More confusingly, some contractors are having their rates cut by 12.5% (which also equates to 14.3% of the already cut pay), because agents not only want to cover the employer NI but also the Apprenticeship Levy, 0.5%.

“[Currently] any party that pays the PSC where IR35 applies will need to account for PAYE income tax, as well as for employee and employer NIC of 13.8%,” Lawspeed, a legal advisory clarified yesterday.

And in “many cases,” says a memo from a boutique jobs agency to its PSCs, the 13.8% charge takes up the majority, “if not all of the margin that allows [our agency] to remain in business.”

‘Big question, real issue’

Lawspeed implied the agency is right when its memo adds that a “big question” is who is going to fund the 13.8%. “Finding the monies to pay this…is a real issue,” the advisory confirmed.

But the agency in question has since come up with an answer -- contractors will be the ones who pay. A shocked PSC on the receiving end of the same answer, albeit issued by a separate agency said:

“My recruiter has [notified me] they are cutting my rate by 12.5%, to cover employer NI and the Apprenticeship Levy, after which they’ll deduct employee NI and income tax.”

The Association of Recruitment Consultancies yesterday acknowledged that contractor pay cuts could potentially be in anticipation of agencies fronting the extra deductions the April rules impose.

‘Passed on to contractors’

One agency (an ARC non-member) says: “If the agency has a payroll over £3m then they must pay 0.5% of payroll in an apprenticeship levy, but all [agencies] must pay employer NI.

“It is these two new deductions that are being passed on to contractors who, if they want to try to avoid them, can push to increase their gross pay rate or be deemed outside IR35.”

At another agency, a commercial director advised: “All that contractors can do to mitigate these new percentages [being deducted from their pay] is the following

“They must renegotiate the supply price to reflect the changes, or get a determination evidencing an ‘outside’ IR35 position.”

‘Regardless of working practices’

Last month, a contractor received such an all-clear from the legislation, having had his contract reviewed by a specialist in the private sector, but the move was in vain.

“I was assessed by [the review firm] and found outside IR35. But then the client…made some decisions on everyone’s status…based on the framework we were provided through.

“They said all contractors provided via Capita CL1 are inside IR35, regardless of the actual working practices… Needless to say the whole process has been pretty frustrating.”

The contractor claimed he would quit his public sector client as a result, turning down the agency’s invitation for him to become an umbrella company.


Another PSC, who points out that temporary IT job openings at some public bodies now specify umbrella company working as mandatory, has received a similar ‘invitation.’

“Been told the client requires contractors to use an umbrella company, not ‘Ltd’ [which I am and have been for the past few years]," the PSC said. "Can [I] really [be] forced to only use an umbrella?”

Told yesterday that contractors are being forced to use umbrellas, the ARC said agencies must not instruct a PSC “one way or the other,” as doing so may constitute giving tax advice.


Yet the association acknowledged that “it will certainly be less hassle for agencies to use individuals that operate through an umbrella”. It is also less hassle than PAYE via the agency.

“I can’t speak for all agencies, but the administrative burden of payrolling a PSC is huge,” says a commercial director at a large agency hiring into the public sector. “We have outsourced the process, but I can imagine other agencies not wanting the admin overhead.”

The ARC isn’t so sure. “Many agencies are already well-placed to run their own payroll and, with the right terms in place, can adjust their rates accordingly to swallow any extra costs,” it said.

Contractor pay rises

Fortunately for contractors, those adjustments are sometimes going their way. “We have several instances where clients have been prepared to raise the rates to offset” the new deductions, the commercial director said.

But time isn’t on contractors’ side. In an email telling its PSCs to jump to PAYE umbrella if they want to avoid the deductions from April 6th, and keep their work with an MoD body, an agency insisted on a reply with four working days.

“Although we have only been sent the decision about your IR35 assessment today,” the agent said on Monday afternoon, having received an ‘inside’ decision, “we are required to communicate back to [the client, via a consultancy] by [this] Friday”. 

The agency then provides the names and contact details of a handful of umbrella companies for the contractor to choose from.

And just like the possibility that the PSC might not even want to move to an umbrella company, the possibility of choosing an umbrella company other than those listed is also not entertained.

‘Not comfortable’

However, one reputable umbrella company (who is not listed on the agency’s email) hinted that contractors should still put forward their brolly of choice, as it could be accepted.

“We hear…way too often [that] the agency may not feel too comfortable with you using a [payroll] company of your own choosing.

“However, we have been successful with some agencies in getting them to allow the contractor to use us, by submitting all of our corporate documents and undergoing a compliance questionnaire” the brolly said.

‘No real exodus’

Perceived lack of choice; swingeing new pay deductions and little time to decide which set-up is suitable for them is not -- despite the odds -- triggering a mass contractor walkout, however.

“The new deductions [of employer NIC and Apprenticeship Levy] only apply when operating a PSC inside IR35,” began one agency with the capacity to administer such an arrangement.

“The same deductions as before [April 6th] apply operating via an umbrella. So no, no real exodus -- we are seeing professionals planning to operate as public sector contractors under either model.”

‘Don’t worry’

Last night, one IT contractor hinted that neither model appealed. “I am no longer with [MoD body] DE&S; I bailed”, he said. “I did though get a call from my agent to notify me that my contract had been declared inside IR35 [after I’d left]”.

Confusion and uncertainty with only about 20 days to go until the April 6th rules take effect appear to be resulting in caution being exercised.

“A PSC worker [here] has been renewed onto only a three-month contract… not the usual six months,” said a contractor whose client is a private sector consultancy supplying a public sector body. “But when they queried as to why this was…they were told this is the ‘new standard’ and told not to worry about it.”

Editor's Note: This article is an updated version of the original.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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