When an agency makes a contract/ temporary placement and the candidate is paid via a umbrella/ limited company it is easy to understand the full contractor cost to the agency as it is the same as the contractor 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 that all costs are covered and that profit is still generated.
Below is an explanation of 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 (or then divide this by the number of working hours per day to get 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 1 a 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 (calculation 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 13.8% to get the Employers National Insurance figure. There is a personal allowance that HMRC give employers before the 13.8% is calculated, but this is dependent on the number of hours worked or the candidates pay rate for that week/month so is impossible to include in a rate calculation (therefore the agency can make an additional £21.39 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. Depending if the agency is under the 1%, 2% or 3% contribution level means that this amount 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 of the pension scheme as is the agencies responsibility to ensure that all candidates have this as an option.
- CONTRACTOR COST
Once all of the above costs have been calculated and added together this gives the agency the true cost of a candidate. Also, these costs added together are the equivalent of 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. Candidates need to understand that even though the PAYE rate paid appears lower, it is the same as the original rate.
TBOS looks after the back office and accounts for many contract and temporary recruitment agencies and includes running PAYE payroll as part of its services. TBOS helps those agencies to calculate the correct rates on the PAYE contractors to ensure they are remaining compliant and will retain their profit margins. Due to the recent IR35 changes, TBOS helped the agencies who were providing public sector workers to move some candidates from individual limited companies to PAYE payroll correctly and compliantly.
For more information on how TBOS can help you process PAYE payroll for your contractors, please contact our office.