HMRC updates payslip guidance for umbrella company contractors

The taxman has updated his guidance on how umbrella company contractors should approach and understand their pay.

Available online, the update outlines key terms like ‘assignment rate,’ ‘gross pay’ and ‘reconciliation statement.’

In ‘Working Through An Umbrella Company,’ HMRC also explains how such companies’ employees can use their payslips to check tax and National Insurance deductions are correct.

'Bad brolly press compelled HMRC to be pro-active'

The trigger for the update is clear to Julia Kermode, founder of IWORK.

“You only have to look at recent bad press to see why the government has produced this official information,” she says. “Clearly they felt the need to be proactive in helping workers”.

However, HMRC is unaccepting that any specific news item about umbrella companies – positive or negative -- prompted its update.

Nevertheless, the HMRC guidance on umbrella payslips went live seven days after a leading umbrella company was accused of using its payslips to hide deductions of £2.00 a week.

'Guidance was inspired by the Zajota case, no doubt'

And the Revenue acknowledges that the hope with its new guidance is that umbrella company workers emerge better informed about deductions to their pay.

Tax lawyer Rebecca Seeley Harris believes the new HMRC guidance for umbrella users was actually inspired not by allegations -- but by a court case that concluded in September 2022.

“This is, no doubt, as a result of…Zajota v. Umbrella Company Ltd in the employment tribunal,” said the boss of ReLegal Consulting, pointing to the November 7th HMRC update.


Seeley-Harris added: “In that case, Mr Zajota claimed an unlawful deduction of wages -- being the deduction of Employer NICs and the Apprenticeship Levy from his wages.

“The tribunal held that there had been no unlawful deduction of wages. Although this judgment brings clarity, it just shows that there is still a need for regulation of the umbrella company industry.”

But there is a need, as well, for the continued and clear distribution of unambiguous information on what umbrella companies are legally obliged to deduct.

'Not the same'

In the case, tribunal judge Joe Plowright tried to do his bit: “The assignment rate is not the same as the claimant’s wages,” he began.

“The assignment rate is the fee paid to the respondent by the end-client and then it is the respondent’s obligation as the claimant’s employer to make relevant deductions from that fee, which include Employers’ National Insurance and the Apprenticeship Levy before determining the claimant’s gross salary.

“Once the claimant’s gross salary is determined, the respondent then deducts tax and National Insurance, leaving the claimant with his net pay.”

'Taxman should be applauded'

HMRC sounds aware that the complexities of getting paid as an umbrella company contractor mean confusion is potentially never far away.

In its updated guidance, addressing contractors, the department said: “If you do not understand the deductions, or if you are not given a breakdown of them, you should speak to your umbrella company.”

Chris Bloor, a payroll adviser at Champions Contractors reflected: “We often criticise HMRC. However any effort to raise awareness and ensure workers like contractors understand [their pay] should be applauded.”

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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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