Umbrella Rates and the National Living Wage

As part of its package of measures announced in the Autumn Statement, the government has confirmed the revised National Living Wage (NLW) for 2024/25, as well as changes to the age threshold. It is estimated that about 2.7 million workers will benefit as a result.  

From April 2024, the NLW will rise by almost 10%, from £10.42 to £11.44 per hour. Whereas currently this applies to workers over 23, the age threshold will be reduced so that it will apply to anyone over the age of 21. 

Rates for younger workers (the National Minimum Wage – NMW) will also increase, with 18-20 year olds earning £8.60 per hour from April 2024, a rise of £1.11.

Impact on PAYE umbrella contract rates 

In line with the NLW and NMW increases in April, our minimum contract rates to pay a PAYE umbrella worker will increase to accommodate the increase.

In the highly competitive world of contract recruitment, we understand that every penny counts. However we are equally committed to compliance and ensuring that contractors receive a wage that is fair and takes into account the employment costs that legally need to be deducted. 

How is the umbrella assignment rate calculated? 

One thing we are frequently asked by agencies and contractors alike is how umbrella assignment rates are calculated. 

If a worker is paid PAYE by the agency, they are offered a certain rate of pay. However the agency has to pay employment costs on top – Employment National Insurance, Apprenticeship Levy, holiday pay and pension contributions. As the employer, they must pass these directly to HMRC and report them accordingly.

Where a worker is paid by an umbrella company, the umbrella company becomes the employer and is therefore responsible for these costs. The employment costs must be factored in to the assignment rate (also known as the charge-out rate) paid to the umbrella company by the agency.

When employment costs come off the topline assignment rate, the worker must be left with at least National Living Wage (age 21 and over from April 2024) or National Minimum Wage (under 21s). Therefore when there is a change to the NLW / NMW, minimum umbrella assignment rates are subject to change as well. 

Rate adjustments for NLW compliance

Ahead of April 2024, we will analyse the assignment rates of all Liquid Friday contractors and identify any that could potentially drop below NLW / NMW from April 2024, once employment costs have been deducted. 

We will then calculate the minimum assignment rate applicable and advise the agency of the necessary adjustment. 

The key is that an umbrella assignment rate will always be sufficiently higher than a direct PAYE rate to cover all employment costs while ensuring the worker gets paid at least NLW. 

You may see some umbrella companies on the market offering lower minimum assignment rates – chances are they are not operating compliantly. The bad apples in the umbrella industry do not care about NLW/ NMW legislation or fair pay for contractors. If such a company is caught paying less than NLW, they are likely to fold, leaving the agency or end hirer to carry the can. 

HMRC can issue a notice of underpayment, requiring the payment of arrears to affected workers and a penalty to the government, which could be up to £20,000 per worker. The government also “names and shames” companies who have underpaid workers, which is published online – you can imagine the reputational damage involved, so don’t get burned!  

If you’ve any questions please speak to your Liquid Friday Account Manager or get in touch with the team.