Most recruiters will, at some point, need to place temporary or contract workers. These placements are a fantastic source of steady revenue, and the best part is that you keep the worker on your books, ready for their next assignment once the current one wraps up.
However, there’s a catch. Paying workers correctly can be confusing, and getting it wrong can lead to serious trouble. HMRC can be unforgiving, and the fines for mistakes can be eye-watering, so it really pays to get this right. Here is a link to a blog we did before: https://mayachi.co.uk/blogs/paye-contractor-rates/
Two main ways to payroll workers:
1) Run payroll in-house (Agency PAYE) where your internal team manage everything from payroll processing, reporting, compliance, and the HMRC submissions
2) Outsource to an Umbrella or Payroll company, which means you will pay more in fees, but the umbrella company will take care of all the heavy lifting and responsibilities.
Whichever route you choose, accuracy and compliance are absolutely key. UK payroll comes with many additional compliance checks and statutory deductions, so it’s wise to have solid internal processes and reliable tech in place to minimise errors.
The Basics are more than just the Pay Rate:
The Candidate Pay rate, which is the amount agreed by the agency to pay the worker/Contractor for their work in either per hourly or daily rate, is just part of the story. The payslip, be it weekly, fortnightly, or monthly, needs to display the full figure of pay accrued for this period alongside all the deductions.
Here are the key components to consider:
1) TAX – Most modern payroll systems are integrated with HMRC’s gateway to automatically check tax codes, but it’s still worth performing an occasional manual check.
Nothing frustrates a worker more than being overtaxed due to an error.
2) National Insurance – Just to make things fun, there are two types of National Insurance – the Employee’s NI is about 12.8% and the Employer’s NI is 15%. Both must be clearly displayed on the payslip and correctly reported to HMRC
3) Holiday Pay – All workers are legally entitled to holiday pay. At its simplest, this is 12.07% of pay for work done. It can either be accrued and paid out when taken or rolled up and paid at the end of the year. Whatever method you choose, it must be calculated clearly and shown on the payslip.
4) Pension – With auto-enrolment, employers must contribute around 5% towards pensions.
You can defer this for 12 weeks, which gives agencies a small buffer, but be mindful that opt-outs and deferrals must be managed properly and processed promptly to remain compliant.
The Umbrella payroll route isn’t free – Umbrella companies charge agencies a margin fee to process worker payroll. This may be a flat fee or a percentage of pay.
Because the umbrella rate includes all legally required deductions plus the umbrella company’s margin, the umbrella pay rate will always appear higher than the basic PAYE rate.
To avoid nasty surprises, it’s crucial to understand the true cost of PAYE. Your agency must ensure that the charge rate to the end client covers all payroll costs and your margin; otherwise, you could end up out of pocket.
Here’s the simple formula:
Candidate Pay Rate + Holiday Pay + Employer Pension Contribution + Employer National Insurance Contribution = True Cost of a PAYE Worker
Knowing your PAYE numbers keeps your contractors happy, your clients confident, and your profits protected.
If you’re unsure about your true costs or want help reviewing your payroll setup, book a free two-hour consultation with the MAYACHI team. We’ll help you make sense of it all.
