Pay day expenses

There is an Umbrella model which claims to help employees make 'savings' yet still honour their National Insurance Contributions (NIC) and income tax obligations. Known as the 'Pay Day Relief Model', the scheme has been singled out by HM Revenue & Customs (HMRC) as being non-compliant with UK tax and Social Security legislation, but what exactly is it and what are the implications for recruiters?

In 2011, HMRC issued its first in a series of clampdowns against so-called 'pay day by pay day' relief models which attempt to circumvent the National Minimum Wage rules. Yet three years on, reports suggest that a number of temporary contractors on overarching employment contracts may still not know precisely how much they are being paid by their payroll provider, and what for.

In practice these models are applied to contractors who incur travel and subsistence expenses that are tax deductible, and where an overarching contract of employment is in operation. The issue is that rather than subjecting the contractors' gross income to income tax and NIC, the Umbrella company applies tax and NI 'relief' to the amount of the worker’s expenses, “with the effect that only the balance” is then subjected to the two liabilities.

For example:

  • Contractor is paid £250 for a day's work, during which time he incurred £100 in expenses - travel or otherwise. Under the pay day relief model, the recruiter deducts that £100 from the contractor's £250 in wages earned that day; hence the name 'pay day by pay day'. Therefore, only the remaining £150 is subject to tax and NIC.

So in this example, the £150 remaining is classed as 'gross pay' in line with National Minimum Wage requirement, meaning the contractor takes home more each day but actually pays less tax and NIC than they should be.

According to HMRC, the contractor in this instance should wait until the end of the tax year and claim the deduction on their annual self-assessment tax return - anything other is unlawful and results in a tax and NIC shortfall to the Treasury.

Not only that, but there is no statutory framework in place which enables recruiters to process tax claims on a day by day basis - this responsibility lies solely with HMRC who, for their part, will apply any tax reductions at the end of the tax year.

Although such pay day arrangements are more applicable to those whose earnings are more prevalent in sectors at the lower end rather than higher, it is important to highlight the need for recruiters to choose their Umbrella provider with care.

At One Click Umbrella we provide fully compliant solutions for your business. We ensure that all your temporary workers are paid at or above the national minimum wage after deductions and we fully support the Government's drive to eradicate our industry of unscrupulous Umbrella providers.

If you would like to discuss this issue or for more information about how we can help your recruitment agency, please contact us on 01928 232 155.