Any questions? I’m self-employed but paying tax and National Insurance through an umbrella company. Is this right?
We regularly receive queries via our website and through our social media channels including TikTok. We cannot give advice, but we try to signpost people to sources of further information and support. Occasionally we will use the questions anonymously and turn them into ‘question and answer’ news items if we think they will be helpful more widely. We have received questions recently, such as the one below, on the elective deduction model.
Question:
Hi. Myself and my colleagues are self-employed agency workers but are being paid through an umbrella company that is deducting tax and employee and employer National Insurance from pay. I’ve read that this shouldn’t be allowed but it seems we are unable to do anything about it.
Answer:
We often hear of issues when umbrella companies become involved in supply chains, including around employers National Insurance (NIC). However sometimes this is down to a misunderstanding of how umbrella companies work, rather than because they are doing anything wrong. We explain more and set out how a compliant umbrella company arrangement should work in our guidance.
To be clear, compliant umbrella companies should be deducting employer National Insurance from the assignment rate that is paid to them by a recruitment agency. The assignment rate is the amount of money from which employer costs are paid and then your own gross pay is formed.
That said, the situation you describe suggests something else may be going on.
When an umbrella company engages a worker, this will usually be under a contract of employment, meaning they become the employer for tax purposes and also for employment law purposes. However, in some instances, they might try and say they are the employer for tax purposes only. This means tax will be taken through PAYE, but the worker may not get all of their employment rights like holiday pay.
This is called the elective deduction model, or hybrid model. It may help the umbrella company save on their costs and obligations - but will likely leave the worker worse off.
Due to some concerns that this model might be becoming more common, we have developed a new page of guidance looking at the model in more detail, why it is increasing, and what some upcoming reforms might mean for workers.
You can find the new page of guidance on the elective deduction model in our umbrella company section.
More generally, if you want to understand if your umbrella company is dealing with your pay and tax correctly, we also have a payslip auditing service that can help you.
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