Minimum wage rise and umbrella companies: what’s your new contractor assignment rate?

As the wonder continues about regulatory reform of the umbrella company market on April 18th 2024, one change is set in stone -- the National Minimum Wage (NMW) increased from Monday April 1st 2024 by 9.8% from £10.42 an hour to £11.44 an hour.

Now in force, this uplift in the National Minimum Wage is a boon for workers across the country, writes Seb Sauca, CEO of SafeRec. And that’s why it was rightly welcomed since the new rate of £11.44 was promised at Autumn Statement 2023.

But the new, higher NMW also brings to light recurring queries from recruitment agencies and workers regarding the new minimum assignment rate, and regarding umbrella company employees rightly wanting to be paid at least the minimum wage.

We’re definitely not blaming agencies or contractors for assignment rate angst

The influx of inquiries we’ve received about the umbrella company assignment rate in 2024 from agencies and workers isn't unwarranted.

Past instances have shown some umbrella companies presenting rates that diverge from agreed margins and arguably worse -- introducing non-compliant models. Both moves create a murky atmosphere for workers, agencies and even end-users, trying to clearly see what’s what.

We believe the path to clarity and trust lies in total transparency, so both workers and agencies can distinguish the unambiguous, trustworthy umbrella companies from the opaque, untrustworthy umbrella companies, often misleading in the hope of growing their clientele.

Understand what you are being quoted by an umbrella company

Receiving the new minimum assignment rate from an umbrella company should come with a clear description of the figures.

Discrepancies arise when umbrella companies exclude certain costs like pension contributions (which they can opt to start after the contractor’s first 12 weeks).

Moreover, the calculation of the contractor’s working hours can vary, with some brollies basing their rates on a 40-hour week, and others on 45-hour week.

Top four factors influencing minimum assignment rate from an umbrella company

In a nutshell, four factors influence the minimum assignment rate (a rate which includes the employment costs) to pay a worker the National Minimum Wage (their basic salary):

1. The number of hours worked

2. The umbrella company's margin

3. The payment of the Apprenticeship Levy

4. The inclusion of auto-enrolment employer pension contribution

With as many as four variables in play, agencies and workers are well within their rights to insist on a detailed breakdown of the assignment rate to ensure clarity and transparency.

A case study / example

Let's delve into the numbers of a concrete example.

Suppose a recruitment agency has a Preferred Supplier List (PSL) of umbrella companies, with an agreed margin cap of £18 per week.

Let’s say the agency asks for a new assignment rate figure based on a 40-hour workweek.

Assumption for the calculations: Holiday Pay 12.07% of Gross Salary, Umbrella subject to App Levy, Employer Pension - 3% of Qualifying Earnings, NI Category Letter A.

In the currently competitive landscape, some umbrella companies might propose a lower £14.50/hour rate, to appear more attractive to recruitment agencies by not including the employer pension contribution, potentially violating the agreed terms.

The April 1st rise in the National Minimum Wage means that agencies now need to agree on new rates with their end-hirers who sometimes aren’t always ready to cover the full uplift which can be quite substantial, as you can see in this table:

All of these reasons underscore the necessity for agencies and contractors to demand a detailed breakdown of quoted rates and to understand them, to put beyond doubt that they are not going to be involved in a tax avoidance scheme.

A reputable umbrella company should provide a detailed assignment rate breakdown within a 24 to 48-hour window. Failure to do so should raise a red flag regarding their transparency and reliability, not just their responsiveness!

What should your umbrella company’s new minimum assignment rate be for 2024/25?

Below, SafeRec.co.uk presents a table of figures exclusively for readers of ContractorUK, outlining the minimum hourly assignment rate based on different umbrella margins and worked hours.

Assumption for the calculations: Holiday Pay 12.07% of Gross Salary, Umbrella subject to App Levy, Employer Pension - 3% of Qualifying Earnings, NI Category Letter A.

Should the rates provided to you not align with the table’s figures (given the specific margin and hours worked), then at the very least you should investigate further -- and not totally unconcerned.

Less reputable umbrellas (what we like to categorise as yellow, orange and red umbrella companies) often employ dubious practices like ‘mini-umbrella company’-type schemes and hybrid models, to offer what seems like an unmatched minimum assignment rate to the agency and a good-looking net pay to the contractor.

Our stance remains the same. Either fully comprehend the rate and its underlying mechanics or, if in doubt, seek the assistance of an impartial third-party to navigate the complexities. But this annual exercise -- the rates for the NMW/NLW change on April 1st ever year -- should not be ducked if you want to avoid potentially looking the fool later on!

In conclusion…

As the higher National Minimum Wage is now in force (‘effective’ is a technical but worth understanding difference), it’s crucial for contractors and recruitment agencies to adeptly manage and embrace these knock-on adjustments to assignment rates. Grasping and authenticating the specifics of the umbrella company assignment rate is not merely advantageous but essential to guaranteeing equitable payment to workers and circumventing any future problems related to HMRC and compliance. Moreover, with the introduction of the £11.44 NMW, it’s imperative for agencies and workers to take the initiative in reassessing current contracts and renegotiating terms as needed, if such a reassessment and renegotiation haven’t been done already.