Umbrella companies – seven things contractors must watch out for in 2024-25

There are a couple of changes on the horizon in 2024/25 for umbrella companies and their users – their employees, alongside some old issues which continue to fester.

So let’s set out some of the things umbrella company workers should be on the lookout for in 2024/25, which commences on Saturday April 6th 2024, writes Meredith McCammond, technical officer at the Low Incomes Tax Reform Group.

1. Drop in employee National Insurance contribution (NIC) rates

From April 6th 24, NIC should be at 8% of any pay over £242 per week or £1,048 per month, up to £967 per week or £4,189 a month. It is 2% on income after this amount.

The January 6th 2024 NIC reduction from 12% to 10% was somewhat sprung on employers, and a few umbrellas may have been unable to amend their payroll system in time for employees to see the benefit in their January payslip. This time round, things should be much smoother - so hopefully you will see the changes straight away!

2. National Minimum Wage (NMW) changes

Make sure you get any NMW increases you are due – the main rate not only increased to £11.44 from April 1st 2024 but includes 21 and 22-year-old since then too.

Also make sure you are being paid the NMW for all your working time. We have heard instances of some umbrella companies under recording working hours, to make it look like pay is at a sufficient level.

While many ContractorUK readers will not need to worry about the minimum wage, increases can impact those on higher pay rates, for example by restricting the amount that you can salary-sacrifice. We give an example, here.

3. Review salary-sacrifice arrangements

Further relating to salary-sacrifice, we know many umbrellas offer these arrangements, particularly for pension contributions.

By using a salary-sacrifice arrangement, an employee pension contribution (usually given tax relief but not NIC relief), is turned into an employer contribution -- which is given both tax relief and NIC relief. So both the employee and the employer make NIC savings on the amount of salary sacrificed.

Some employers go further and share the 13.8% employer NIC saving with their employees rather than keeping it for themselves. While there are no rules governing the activity here, and employers do not actually have to offer salary-sacrifice in the first place, it might be worth a conversation with your umbrella to make sure their approach and your expectations are aligned!

4. Disguised Remuneration and Mini Umbrella Companies

Disguised Remuneration (DR) is where you are paid a minimum wage element and a non-taxable element like a loan, grant, or ‘advance.’ It allows some ‘umbrella companies’ to carve a higher net pay amount out of a lower gross pay amount, and it reduces their employer costs to boot. DR is not compliant with tax law.

Even though what lies beneath DR is a failure to operate PAYE properly at employer level – it tends not to end well for workers.

So as we advise here, don’t be wooed by the idea of higher-than-expected net (take-home) pay. Helpfully, the government provides a calculator that contractors and other taxpayers can use to work out what ‘expected’ should total. Don’t rely on the fact friends or colleagues seem to have been in these arrangements and nothing has happened to them – and definitely do not let yourself be paid through DR unknowingly (see ‘Check Your Payslips’ below).

Meanwhile, Mini-Umbrella Companies (MUCs) don’t look like they are going away – make sure you are not in one! You will never be with any one of these so-called ‘employers’ long enough to accrue any rights, and you will have an unusual and fragmented employment record, which could impact on you in many ways. For example, your ability to obtain a mortgage or a loan might be adversely affected.

The key giveaway that you may be in a MUC is that your payslips will show frequently changing employer names/PAYE references.

5. Check your payslips!

In terms of payslips, it’s vital to check them regularly for many reasons including, as mentioned, so you can avoid failing foul of DR!

When checking that your umbrella company payslip is correct, note that although not actually required by law, most employers do include helpful information on payslips like the tax code in operation, and ‘year to date’ figures, to aid transparency and help you reconcile the figures.

If your payslips are not ‘fulsome’ or are hard to follow, then ask yourself why.

Similarly, if you struggle to get your hands on your payslips in the first place – again – why is this happening?

One complaint we hear a lot is:

‘I’ve left my employer and I’ve lost access to all my online payslips.’

So, it’s a good idea to try and save copies of your payslips as they are published. However, if you haven’t done this, speak to your ex-employer on this – some systems have admin settings that can be changed to give ex-employees certain permissions for a limited period of time.

6. Hybrid model

While the hybrid model is usually aimed at lower paid workers, I include here for completeness.

In this model, the worker gets treated like an employee for tax purposes and like a self-employed person for all other purposes!

To give effect to this, you will probably be engaged on ‘contract for services’ terms with some kind of ‘opt in’ to PAYE. While it is technically possible to have a different employment status for tax law and employment law, the law looks behind labels and paperwork to the facts of the arrangement.

In most scenarios therefore, the likelihood is that the distinction is being used in an artificial way to save the umbrella company money.

The umbrella will not have to provide you with key employment rights, which is unlikely to benefit you in any way at all. In particular your key rights like minimum wage, holiday pay and auto enrolment get bypassed. In fact, you may well have just quit contracting altogether through your own limited company, just to get away from a similar scenario!

7. Remittances

Finally, make sure that any amounts that are being deducted from your wages are being paid to the relevant bodies -- this includes pension, student loan and tax and National Insurance.

If you don’t have it set up on your phone yet we’d recommend it because HMRC’s app allows you to check what has been reported in terms of employer payments, tax and NIC in just a few clicks.

The HMRC app may even be able to display the latest real-time payroll information from your employer, before you get your payslip. This allows you a quick and easy way to check what your employer is up to!

Final thought

Hopefully these seven tips will help you start 2024/25 on the right foot, with a pay and tax health check, which prudent contractors will repeat throughout the tax year to stay safe when using umbrella companies.