Understanding Contractor rates is fairly simple when you understand the different calculations involved. For starters, any agency making either a contract or temporary placement and the candidate is paid via an umbrella or limited company, the rate of pay to the agency will be the same as the contractor’s rate of pay.
However, when a candidate is paid PAYE through the agency payroll, the cost to the agency takes a few more additional calculations to ensure all costs are covered and the profit is still generated.
TBOS details how to calculate the true cost of a PAYE candidate:
Candidate Pay Rate
This is the rate that the candidate agrees to be paid either per hour or per day. If you are calculating the rate based on a salary then you would divide the salary by 260 days to get the daily rate.
Salary ÷ 260 days (working days) = Daily Rate
Daily Rate (total above) ÷ Number of Working Hours, Per Day = Hourly Rate
If you would like the hourly rate, you would further the calculation and divide the previous total by the number of working hours per day, this would give you the hourly rate.
Holiday Pay Allowance
Holiday pay is calculated as a percentage of the candidates pay rate. The percentage is based on the number of day’s holiday that the candidate is entitled to. The minimum number of days that an employee is entitled to is 28 days over a 1 – year period (broken down as 20 days holiday plus 8 Bank Holiday days). The rate of holiday pay is 12.07% and the calculation is as follows:
260 (working days) – 28 (holiday days) = 232
28 (holiday days) ÷ 232 (total above) = 0.12068 x 100 = 12.07% = Rate of holiday pay
This calculation is based on the assumption that the candidate is entitled to a full holiday year. Holiday pay should be held by the agency until the candidate takes/requests holiday or they leave employment.
Employers National Insurance
Employers National Insurance is calculated using the candidates pay rate plus the holiday pay allowance. This figure is then multiplied by 15.05% to get the Employers National Insurance figure.
Employers National Insurance + Holiday Pay Allowance = Total
Total x 15.05%= Employers National Insurance
There is a personal allowance that HMRC give employers before the 15.05% is calculated, but this is dependent on the number of hours worked or the candidates pay rate for that week/month so it is impossible to include in a rate calculation, therefore the agency can make an additional £26.34 in profit if the full allowance is used.
Auto-Enrolment Pension Contributions
Nearly all companies are now under the government auto-enrolment pension scheme and this also includes PAYE contractors, meaning that pension contributions need to be included in the rate calculations. The current rates for pension contributions from employers is 3% which needs to be calculated against the candidates pay rate plus the holiday pay allowance. This is added whether the candidate has opted in or out with the pension scheme under the agency’s responsibility, ensuring all candidates have been supplied this option.
True Contractor Cost
Once all of the above costs have been calculated and added together this gives the agency the true cost of a candidate. These costs are also the same as what an umbrella/limited company contractor would be paid.
If the candidate is already using an umbrella/limited company and then decides to be paid PAYE instead, you can work the calculations back to get the candidates PAYE rate. Agencies will need to explain to candidates that even though the PAYE rate paid appears lower, it is still the same as the original rate.
How TBOS Can Help
TBOS looks after the back-office and accounts for many contract and temporary recruitment agencies, this includes running PAYE payroll as part of our services. We also help agencies to calculate the correct rates on the PAYE contractors to ensure they understand the process, this helps them to retain their profit margins moving forward.
As the IR35 legislation affects both the public (since April 2017) and private sector (since April 2021), there has been a large change from candidates being paid by a limited company to being paid via PAYE or via an Umbrella company. TBOS has ensured that this change has been done correctly to ensure that the agency’s risk has been minimised under the new legislation.