Contractors' Questions: Can brollies take unused expenses out of pay?
Contractor’s Question: In April, my umbrella company introduced a fixed expense for subsistence - £40 per week, which I agreed to. But it never explained to me that when I claim less than the £40, the unutilised amount is subtracted from my net pay. Isn’t this unlawful? It certainly feels like unreasonable practice.
Expert’s Answer: In April 2016, ‘salary sacrifice’ restrictions were introduced which prevent umbrella companies from sacrificing taxable salary and substituting it with tax-free expenditure.
Some umbrella providers have attempted to work around these new restrictions by introducing new models that allow contractors to gain tax relief on expenses without it being deemed a salary-sacrifice. This is done by the umbrella company and the worker agreeing to a fixed expenses/salary ratio up-front. These values are written into the contract such that providing tax relief on any portion of the fixed expenses amount doesn’t result in the umbrella company sacrificing the worker’s taxable salary component.
For example, a worker earning £20.00 per hour might agree with their umbrella company that their salary is £15.00 per hour and their expenses ‘pot’ is £5.00 per hour. In this example, the worker is able to offset up to £5.00 per hour in expenses, without it ever reducing the amount of salary that they receive, since their salary always remains constant at the agreed rate of £15.00 per hour.
Unfortunately, this model does have a major flaw which is that in those instances where the worker cannot demonstrate expenditure levels exactly equal to the value of the expenses ‘pot’, then the worker loses out. The expenses ‘pot’ can only be fully utilised if the worker can demonstrate the expenses, and any shortfall cannot be reclassified and paid out as salary if the salary component is already being maximised (i.e. is at the full £15.00 per hour as per the example above).
Our umbrella company does not believe that this sort of model is reasonable practice. While it might technically be a legal way in which to operate, it places far too much risk on the worker/contractor by expecting them to be able to accurately calculate their expenditure values before they’ve even started the work assignment. And because of its rigidity, the model offers no scope for reassessment during the contract.
The expert was Marc Scott, a director of Liberty Bishop.
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