David Cameron’s coalition government is taking a hard line on those umbrella companies who flout the rules. Just like the previous administration, the current government are taking a zero tolerance stance with umbrella companies who operate schemes with the sole aim of minimising tax and NIC payments while topping up the take home pay of contractors with expenses.
For some time, many umbrella companies have actually been flouting the national minimum wage legislation by paying a lower rate than the national minimum wage specification of £5.80 per hour. As previously mentioned this low rate of pay would then be topped up with expense payments. Of course, the benefit for the umbrella companies is that they save on their employers’ NIC contributions. However, while at first glance it might appear that there is no adverse effect for the contractor as the take home pay is the same either way; on closer inspection the contractor is actually missing out on vital NICs which count towards future pension and state benefit entitlement.
The government have now taken steps to counteract this, with new legislation coming into force on 1st January 2011. From this date these umbrella companies will have to pay their contractors the full national minimum wage.
The umbrella companies who have been taking advantage of the current loophole will have no choice but to adhere to the new rules. While their current practice is not illegal, it is viewed by many as unethical. Such schemes have created a two-tier umbrella sector with companies like Crystal Umbrella providing a service which exceeds the standards set for the industry while others operate schemes designed only to save themselves money without benefiting the contractors who use their service.