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The Government is to amend legislation to prevent some umbrella companies from exploiting National Minimum Wage rules.

Some umbrella companies have been paying their employees salaries below the NMW (£5.80 per hour), and supplementing these pay levels with expenses claims.

These schemes provide tax and National Insurance savings as they reduce the amount of umbrella company employees' pay that is subject to NICs.

Government consultation period

A Government consultation, which began in February and closed in May, aimed to develop the best solution to closing the current loophole in the NMW rules. The consultation received 54 responses - split between those who were strongly in favour of maintaining the status quo, and those strongly in favour of making changes.

Last week, the Government decided that action should be taken in relation to these arrangements where they involve National Minimum Wage workers. The intention of the changes, which you can read here is only to exclude the payment of expenses for travel to a temporary workplace from counting as pay for NMW purposes. The changes will take effect from 1 January 2011.

Industry response to the proposals

The latest Professional Passport newsletter highlights the problems that result from misuse of the current rules:

"Where a provider operates the expenses loophole, it can appear that the contractor is receiving around the same amount of total take home pay; what contractors are often unaware of is that they are potentially missing out on credits towards state benefits and pensions. Furthermore, it is the provider that typically benefits the most as they retain the additional employers National Insurance savings these schemes provide."

Contractor accountant, JSA, has supported the Government's proposed changes. this can impact adversely on a worker’s access to earnings-related contributory benefits.

Jonathan Margrave, Head of Sales and Marketing, said:

"At JSA, we have always believed that, although these schemes were not technically illegal, they were exploitative and unethical. Whilst we understand the commercial pressures on margins and profitability that businesses face it is not our view that lower paid temporary workers should potentially lose vital benefits because of salary sacrifice schemes on offer through some umbrella company providers. Some workers were offsetting so many expenses they actually paid no tax or NI at all. These welcome changes are a further example of why service providers should operate on a compliant level playing field in applying industry regulations and not resort to trying to gain questionable commercial advantage at the expense of the most vulnerable."

Crystal Umbrella also welcomed the proposed changes:

"Obviously, any increase in NMW is a good thing for the temporary labour market. Not only will it go a long way in protecting the vulnerable sectors of the temporary labour market, but it will also allow them to receive full entitlement to state benefits (based on National Insurance Contributions)."