From 1st October 2013 there will be an increase in the National Minimum Wage  (NMW) rate for workers aged 21 and over from £6.19 to £6.31. Below Miles Grady, Director of PayMatters Limited, explains what this could mean if you are a contractor working through an Umbrella Company:

The good news is this won’t affect many contractors. It should only affect contractors where the role with the agency is at a contractual rate under £10 per hour and even then only those where expenses are at a high enough level.

Although many contractors will be performing roles (normally via a recruitment agency) at a contractual rate much higher than the national minimum wage the raise in the national minimum wage can affect their take home pay because their contract of employment is actually through the umbrella company they work for.

The way an umbrella company works is that you are paid a basic wage based on the national minimum wage plus an increment in lieu of holiday (holiday pay) plus expenses incurred in performing this work. Any surplus left over from the money generated from the agency less the umbrella company’s margin and costs  is then paid as a commission.

But what does this actually mean?

The main effect is that the umbrella company can’t pay you more than you bring in (after meeting your statutory entitlement in full). If after paying you your statutory entitlement of the national minimum wage plus holiday pay plus the umbrella company costs there is insufficient income generated to pay all your expenses then an element of your expenses will not  be paid but instead be rolled over for future pay periods. This doesn’t mean you are out of pocket as you have still been paid everything you’ve brought in (less umbrella company margin/costs). The effect in your net pay is because expenses can be reimbursed to you tax free whereas the national minimum wage is not.

Therefore an increase in the national minimum wage means that more of the amount you are reimbursed is taxable if this leads to a restriction in the amount of expenses you can be reimbursed.

i.e. for the majority of people there will be no effect. It is only if your expenses are very high or the contractual rate with your agency is generally under £10.

Ironically the national minimum wage is designed to protect low paid workers but in this case can actually work against them.

If you are working or considering working as a contractor and are keen to see the effects of this change then PayMatters would be pleased to provide you with a complete pay illustration. Please call us on 0800 121 6513.