Umbrella Companies and National Minimum Wage Rules
Until recently, a common practice among some umbrella companies was to pay salaries below minimum wage and make up the difference via travel and/or subsistence expenses. The claimed expenses would lead to a reduction in tax and NI contributions owed, meaning that you, as the contractor, wouldn’t see anything unusual in your take-home pay. The biggest problem was that unscrupulous companies would often claim expenses on costs that hadn’t been incurred, leading to unpleasant situations for the employee who would be at risk in the future as they could incur additional tax liabilities on these fictional costs.
In January 2011, regulations regarding the National Minimum Wage issued by HMRC came into force stipulating that benefits in kind cannot make up part of the National Minimum Wage. In other words, umbrella companies will no longer be able to use benefits in kind to make up the minimum wage portion of the salary they are paying their employees.
Benefits in kind refers to things such as meals, medical insurance, fuel, childcare vouchers and luncheon vouchers.
HMRC has made it quite clear they are not only aware of the schemes certain umbrella companies are engaging in to avoid paying minimum wage but consider them unlawful and will take the appropriate action. Some of the schemes umbrella companies engage in include:
- Paying subsistence expenses as a daily allowance instead of travel expenses
- Classifying employees as directors
- Employing holiday pay adjustments
- Under recording the number of hours an employee works