National Minimum Wage

In Focus: How Will The Rise In The Minimum Wage Play Out For Contractors?

30 September 2014

As of 1st October, the Government’s approved increase in the minimum wage will come into effect. The Low Pay Commission had set various recommendations for the Business Secretary, Vince Cable, to assess. Cable accepted in full these suggestions, and the wage rises at national minimum level will work as follows:

  • a 19p, or 3%, increase in the adult rate. This moves the hourly rate up from £6.31 to £6.50
  • a 10p, or 2% increase in the rate for 18 to 20 year olds. This moves the hourly rate up from £5.03 to £5.13
  • a 5p, or 2% increase in the rate for apprentices. This moves the hourly rate up from £2.68 to £2.73

The Government’s recommendations will have little immediate impact for contractors. However, Umbrella Director Miles Grady ran through a few thoughts on how the minimum wage increases could affect contractors working through umbrella companies:

“At the pay levels national minimum wage operates at, the probability is few contractors will see discernible changes to their pay scales. The majority of people will be earning more than, say, £10 per hour and run standard expenses; so as mentioned the effects will be null and void in those cases. However, we feel it is important to set a few things straight.”

“Firstly, although contractors are usually paid on agency rates, the actual employment contract comes through the umbrella company they register with. The umbrella company pays a basic wage based on the national minimum, plus any increments in lieu of holiday. Additionally, expenses incurred performing work are also catered for.”

“The money generated from agency rates, less umbrella company costs and margins, is then retained by the contractor who is paid in commission.”

“Secondly, and again these rules apply to those people who are regularly paid on agency rates of less than £10 per hour, it is important for contractors to note that an umbrella company cannot pay more than the contractor brings in. This can affect expenses.”

“After paying out on the statutory minimum along with holiday pay and taking into account the costs associated with umbrella services, in some cases there may be insufficient funds to cover expenses connected with work. What happens here is that expenses are rolled over and catered for in future pay packets.”

“This doesn’t leave the contractor out of pocket. Any net pay effects are because expenses can be reimbursed to contractors tax-free, whereas this is not possible with national minimum wages.”

“Importantly, we must stress that the national minimum wage increases have very little impact, in the main, for contractors working with umbrella companies. They are usually on agency rates that are much higher than the £10per hour discussed here, so changes are negligible.”