Umbrella contracting booby trap - I fell straight into it

So, the issue I've experienced with umbrella contracting is the following.

I agreed that I was to work through Parasol with my employer agency (I work for an recruitment agency, in house, delivering some marketing related projects) on the basis of a pay of £34K p.a. pro rata. This was converted to a day-rate of £130.77. The payment was agreed to be made monthly.

The agency uploaded the contract to Parasol, but somehow failed to instruct Parasol to set me up on a per-month basis. Parasol didn't bother asking and put me on a weekly schedule by default.

This means that the first payment from the agency was allocated to one week only, meaning that the system (I use this term loosely here but I suppose it's the automated back office system we're talking about) assumed that I would be earning about £1,500/week (translating to an annual salary of about £75K). I assumed that the high deductions were down to the emergency tax code so didn't take it any further at that point.

When the pay came through for the following four weeks though, I got a minor shock. I had billed £2,484 and the payment to me was a disappointing £1,350 which meant that 46% of that pay had been deducted.

After a bit of digging and an email and a phone call to Parasol it was clear what was happening - the weekly invoices that I sent were collected and then paid in one single payment. This meant that the system assumed that I was (I know I'm repeating this) earning £2,484 per week, or £120K p. a. when in actual fact I was earning less than a quarter of that.

The result - I didn't get the full allowance relating to employers NI

Employment costs cover Employers' National Insurance Contributions (NIC) which is currently calculated at 13.8%. We calculate this once we have deducted expenses, the margin and the Employers’ NIC free allowance of £144.00 or £624.00 depending on whether you’re on a weekly or monthly pay period.

And I was also taxed in the higher tax bracket on some of my income.

So to the problem - I have, through negligence by the agency and Parasol (I don't know who to blame really) paid many hundred pounds too much in employers NI.

I have been advised by Parasol to regard these over-payments as sunk costs that I have no chance of reclaiming (from the HMRC).

Parasol were very reticent to admit it but I did manage in the end to get them to admit that there were 'quite a few other people who had had this happen to them in the past'.

Despite this, Parasol maintained that it was not their responsibility to make sure that contracts and payments were matched up, and that the 3rd party (in this case the agency) had responsibility to know the HMRC guidelines in some detail and to take full responsibility for how they uploaded contracts and issued instructions in regard to a contract. Parasol does not offer any guidance and/or advice relating to any of this - the agency are on their own

I was then advised to move to weekly payments, which I promptly did, in order to at least limit the damage. So what happens then? The agency pays one week's invoice on last Friday, meaning that the funds reached Parasol on the Monday. On the Monday they paid the second invoice. Because these two payments were in one single week (ignoring the fact that the payment were in relation to two different invoices and that the invoices clearly stated that they were for work delivered in two distinct periods), which Parasol took to mean that the money paid out was for one week only and was allocated to the same week (the first week of this month).

So despite having moved to weekly payments, through the fact that the agency were unaware of that any payments made in one week are considered related to that week only and cannot be considered as relating to two different pay periods (weeks). All this they blame on the HMRC who issue guidelines to this effect. According to Parasol.

Again, Parasol shows no interest in understanding the issue and offer no help or guidance

Needless to say, I'm more than a little hacked off and will leave them today, even though it may be more hassle than it's worth (considering 4 weeks notice period and that my contract is up at the end of August).

CUK Contractors Respond:
How can you work for 130/day? Is it a fixed term contract?

aha, well, that's a warranted question I suppose - I was desperate! Well, as I've mentioned somewhere here, I am meant to be on £34K pro rata. That was converted to a day rate of £130. Does that sound about right? It was just calculated as (34000/52)/5=£130.77.

The way it currently works then it's inevitable that I will pay about 35-40% of my gross salary in tax and fees. What i don't understand is how Umbrellas are allowed to market themselves as a tax efficient vehicle when for anyone earning less than about £70K would have been much better off working direct.

As a comparison I looked at the calculator at UC and it gives me the following numbers:

Pay Frequency: weekly
Income: 654.00
Expenses: 40.00
Employer's NI: 53.78
Employee's NI: 77.54
Employee Tax: 75.09
Total All Tax: 206.41
Fees: 26.50
Tax Code: 810L

Total Net Income: 418.67

These numbers seem more in line with what I actually get. The Parasol calculator claimed that I should expect to get about £517. To lull unsuspecting low income earners such as myself into a false sense of security by providing wildly inaccurate predictions is nothing other than fraud.

Like I mentioned, I might look into how I can take this further. Maybe trading standards. I probably wouldn't have much luck in the courts..

ContractorUmbrella Responds:
I think you'll find that the problem with the calculator on the website you mentioned is that it assumes a level of expenses that are not shown separately. Therefore if you don't have any expenses or they are not as high as the amount assumed, your take home pay will always be lower than that quoted.

To address the other point that you mentioned - if an agency offers you the same rate to go direct with them as they do for working through an umbrella company then you should take it as you will almost definitely be better off. However, it is usual practise that the rate offered for going direct will be considerably lower as the agency will then be taking on all of the employer responsibilities.

CUK Contractors Respond:
Sadly some agencies will offer a their PAYE rate and then try and force you down the Umbrella route and not change the rate and believe or not pocket the extra monies they normally get of the client to cover your NI payments.

You should take this up with the agency - not a lot Parasol can do and generally if it does not make Parasol any extra money they will not be interested in getting involved.

ContractorUmbrella Responds:
As stated above the rates that are offered to work PAYE on an agency's books or through an umbrella company should always be different with the typical uplift being around 15%

CUK Contractors Respond:
Set yourself up as a director of your own ltd company, then you can determine your own salary to avoid the NI and take the rest of your pay as dividends and expenses. In my experience Umbrella companies are just a con!

ContractorUmbrella Responds:
You can only do the above IF you are outside IR35 - to advise someone new to contracting to avoid NI and take dividends without stipulating that it is dependent on IR35 status is irresponsible. As for umbrella companies being a con; I would suggest it depends which umbrella company you chose

CUK Contractors Respond:
They're not a con, they are a great way for many people to operate because they are dead simple and you don't have all the overhead, admin and responsibility of running a LTD company, along with the threat of a tax investigation hanging over you.

Each to their own, but a lot of people do prefer the simplicity and piece of mind of an umbrella...