The Chief Executive of employment intermediaries trade body PRISM, Crawford Temple, has appeared on BBC Radio 4’s Money Box programme to clarify legislation for contracting professionals who provide their services via Umbrella Companies.
The programme highlighted a common misconception that people contracting as Umbrella Company Employees pay two different categories of National Insurance Contributions (NICs): the employer’s as well as the employee’s.
The programme’s presenter, Paul Lewis, raised a scenario in which a contractor who was engaged on a relatively modest income via an Umbrella Company could find him- or herself paying more NICs and taxes than someone earning almost £100,000 per annum.
Mr Temple was able to explain that the belief that Umbrella Company contractors simultaneously pay two types of NICs was mistaken: in accord with HMRC rules, they only pay one, the employee’s NICs. The employer’s NICs are paid by the Umbrella Company, not the contracting worker.
He told listeners on Saturday afternoon: “Because of the structure of the contracts, the money coming into the umbrellas effectively is the umbrellas’ money, which allows them to make the deductions.”
According to PRISM, contractors who decide not to be paid on a PAYE basis by an agency are paid more to allow for the deductions that the Umbrella Company are required to make, including the employer’s NICs.
Mr Temple went on: “It’s confusing, and I think if there’s a takeaway for a contractor, it would be to ask your agency what the PAYE rate is and the limited company rate, and what they will find is that most of the responsibly-run providers will then give them an illustration to show which one provides them the best route.”
He also explained that he and his colleagues had been pressing the Government to conduct a strategic review of the taxation system, as it hasn’t kept pace with the variety of new engagement models practised in the modern business world.
Mr Temple was referring to the outmoded assumption held by HMRC that the workforce can be neatly divided into two categories: employed or self-employed. With ten per cent of the modern workforce made up of freelancers, contracting professionals and other flexible workers, this dual category system is incapable of doing these people justice, as they clearly constitute a third type of worker who falls into neither bracket.
He noted that PRISM had received the support of 55 Parliamentarians across all parties earlier this year, each of them signing an open letter urging the Chancellor to authorise a strategic review.
Following further consultation with PRISM, the SNP has since tabled the proposal as an amendment to the Finance Bill, and it is yet to face a vote in the House of Commons.