Why umbrella contractors switching from a limited company rate need a 23 per cent uplift

Eagle-eyed ContractorUK readers (and that’s easily most of this website’s visitors) will have noticed I last month recommend a 23 per cent uplift on a limited company rate to cover employment costs taken from your day rate, where you’re an umbrella contractor on an inside IR35 role, writes Lucy Smith, founder of Clarity Umbrella.

More variables than you can shake a brolly at

What I should have perhaps clarified is that while we get asked over and over again to do rate comparisons when a contractor is switching from ‘limited’ to ‘umbrella,’ there’s actually no really easy formula to answer this conundrum, due to the fact that payments from the limited company can be taken in so many differing ways.

Through LTD (also known as PSC – Personal Service Company), some payments can be taken as PAYE (albeit differing levels dependent on what you choose), some through dividends, and that’s aside to expenses considerations, pensions, and maybe even a spouse/partner drawing funds from the business. So giving a ‘cold’ comparison isn’t easy; it might even be the contractor sector’s very own version of trying to compare apples and pears!

(Dual) clarity

All that said, when the relevant legislative changes were made many moons ago, it was made very clear (and still is clear) that if an assignment was being moved from ‘outside IR35’ to ‘inside IR35’ and the role and duties stayed the same, then the employment costs were to be covered by the end-client and not passed on directly to the contractor. Hence an uplift should have been imminent.

So in the hope of achieving further clarity, what is the best way to look at a cost comparison on a day rate, if you were limited but are now going to brolly?

You need to look at the additional employment costs i.e. Employer’s National Insurance, the Apprenticeship Levy and the umbrella margin, and work out how to ensure that these costs are covered as part of your ‘assignment rate.’

What your assignment rate needs to cover: explained

Unfortunately, it isn’t quite as simple as saying there needs to be an additional 13.8%, 0.5% and the bit for the umbrella margin. So why is that?

Well, as soon as you start upping your day rate, then automatically these employment costs are going to increase -- again hitting your bottom line.

So, let’s take a look at how we can get closer to what you deserve!

If we take a contractor working via their PSC on £500 per day, well IF they were paid through PAYE on this assignment rate, their employment costs and figures should look as follows:

Invoice Value / Assignment Rate: £2,500.00

Employers NI: £277.58

Apprenticeship Levy: £10.93

Umbrella Margin: £25.00

This adds up to a total of £313.51 per week in employment costs that we need to try and cover in your net pay, in effect meaning the contractor is not covering them as the original legislation suggested. The take-home pay on £500 per day via an umbrella would be £1,471.30, so we need to try and net an additional £313.51 to give a take-home of £1,784.81.

The magic number? It’s 23%(ish)

Looking at a day rate of £625.00 via an umbrella would (on a standard tax code) net you £1,784.10, and hey presto cover those employment costs!

Dependent on the rate this means you need to be looking at an uplift between around 23% (the magic number I cited at the top and mentioned last month), and up to 25%, against your original limited company rate to cover the employment costs.

Finally, if you don’t ask…

With tech contractor roles advertised as “Umbrella ONLY,” rather than a simple “Inside IR35,” there is unlikely to be any push back based on the above. However, for those that do advertise the roles as “Inside IR35,” then there is just cause for the contractor to go back to them and ask the question as to what the uplift may be to cover those employment costs. The conversation may not go the way you want, or anywhere actually, but in our experience it’s always worth the ask!

Tuesday 4th Jun 2024
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Written by Lucy Smith

Lucy has been in the umbrella market since 2013, and has always been an advocate of compliance and transparency in this industry. Offering Clarity by name and by reputation! Clarity Umbrella Ltd Lucy has sat on numerous HMRC round table events; contributed to the Low Income Tax reform group and is always on hand to provide advice to the ContractorUK forums.
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