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In April this year, the government announced the national minimum wage (NMW) for over 21s will increase by 15p from October 1 2011 to £6.08. The NMW is reviewed by the government each year and will reflect national inflation and living costs; which we all seem to be struggling with. This increase of 2.5% will intern increase the minimum wage that clients or companies will pay for contract staff through an umbrella firm.
By negotiating an experienced contractor via an umbrella company, prospective employers will have to pay a minimum of £8 an hour for the contractors' services. This is the minimum that umbrellas can process your pay. If you are on a contractor payroll, as opposed to that of a permanent employee, Holiday Pay and Employers' NIC must be taken into account, as well as the fee charged by the umbrella company.
Below is a simple table of the figures involved in your final take home wage:
New national minimum wage - £6.08
Holiday Pay (12.07%) - £0.73
NIC - £0.84
Total - £7.65
Your umbrella company's fee of, for example, £10.99 per week must also be added to the final wage. Over the average working week of 37.5 hours this is calculated at £0.29 per hour. This raises the minimum payment of contractors under an umbrella scheme to £7.94 per hour from October 1 2011.
Since January 2011, the government introduced new guidelines to halt the blatant exploitation of vulnerable temporary workers which has unfortunately taken place within the umbrella industry in previous years. Some companies had exploited their contractors by paying them below the NMW and then topping up their wage with expense claims which they are already entitled to.
This calculation of wages in this manner significantly reduces the amount of tax and NI payable. The employee to whom this is happening, unless clued up about their wage calculations, would be unaware of any wrong doings as their take home pay would be about the same. Companies doing so are avoiding tax and NI obligations and therefore breaking the law, leaving the contractor at risk of future tax liabilities.
HM Revenue and Customs have reiterated that taxable 'benefits in kind', which include meals, fuel and vouchers, do not count towards a contractor's minimum wage. If you suspect your umbrella company is doing this then report them and switch to a more reliable umbrella service immediately.
For the self-employed, tax can be a headache. Using an umbrella company or forming a limited company can be an efficient way to manage tax affairs, but ensuring you get the right structure for your business is essential.
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