How Tax Works when you are temping.
In a typical temping agency arrangement, the agency places you with an ‘end client’. You usually carry out your work under the client’s day-to-day supervision, but you submit your timesheets to the agency, which is responsible for paying you.
Strictly speaking, you are not usually classed as an employee of either the end client or the agency. However, a special rule in tax law treats the agency as your employer for tax purposes. This means the agency must deduct Income Tax and National Insurance contributions (NIC) from your wages through the Pay As You Earn (PAYE) system. In addition, the agency has to pay employer NIC. Although this is an extra cost to the agency, it is generally covered by the fee they charge the end client.
Agencies and Umbrella Companies
Agencies are specialists in finding people temporary or contract assignments. However, many don’t want the responsibility of handling HR and payroll for the workers they place. Instead, they often pass this on to umbrella companies (‘umbrellas’).
A reputable agency should ensure that any umbrella company they recommend is fully compliant with the law. They should also transfer enough money to the umbrella to cover all employment costs related to you. This includes not only your gross pay, but also things like holiday pay, employer’s National Insurance contributions, auto-enrolment pension costs, and the umbrella’s margin. Together, these items make up the ‘umbrella company rate’ or ‘assignment rate’ , the amount the agency pays the umbrella. This money then becomes the umbrella company’s income, from which they pay your wages.
It’s important to be clear about what rate your agency is quoting. If you are working through an umbrella, it should always be the uplifted umbrella or assignment rate.
Unfortunately, not all agencies handle this properly. Some fail to uplift rates correctly, while others may even be incentivised through commissions to steer you towards umbrella companies with questionable practices. If you are ever uncertain or unhappy with what you are being asked to sign, take time to think carefully before agreeing.
HMRC has published guidance on GOV.UK to help agencies understand their legal responsibilities when working with umbrella companies and to ensure supply chains remain compliant. Although written for agencies, workers may also find this guidance useful, as it helps to explain the different relationships and responsibilities involved.
Example: Sarah – umbrella company or assignment rate
Sarah’s agency secures her an assignment paying £150 a day (gross). On top of this, there are employment costs of around £45. This means the end client actually pays the agency £195 (plus a margin).
If the agency only passes on the £150 to Sarah’s umbrella company, she will be very disappointed when her first payslip arrives — because the umbrella will have to deduct all the employment costs from that £150.
To avoid this, Sarah must ensure that her agency pays the umbrella the full £195 they received from the end client, so her gross pay is protected.
Travel Expenses.
As an agency worker, you may take on many different temporary assignments and often spend a lot on travel getting to each workplace. However, HMRC guidance (in their Employment Income Manual) makes it clear that agency workers are not normally entitled to tax relief on the cost of travel to and from their main place of work.
That said, there are situations where travel expenses can be claimed:
Travel during work: If you need to travel from your assignment office or work location to visit a customer or another workplace, these costs are usually allowable. In some cases, travel directly from home to a customer or workplace may also qualify, unless the journey is essentially the same as your normal commute.
Travelling appointments: If your role inherently involves travel (for example, a delivery driver or meter reader), then you may claim tax relief on all work-related travel, even when journeys start from home. However, if you must report to a depot or office at the beginning and end of the day, your commute to and from that depot is not allowable.
Multiple jobs in a day: Some agency workers, such as home care nurses or domestic cleaners, may do several jobs for the same client on the same day. In these cases, HMRC allows you to claim for travel between different jobs during the day. However, you cannot claim for the journey from home to your first job, or from your last job back home. Note: HMRC’s position has recently been questioned in a case, so this area may evolve.
Travel between end clients: If you are travelling between the premises of two or more end clients on the same day (where both jobs came through the same agency), HMRC accepts that the travel costs between those workplaces are allowable. Again, though, travel from home to the first client and from the last client back home is not.
If you are eligible to claim, you can do so using form P87 on GOV.UK or you can get more information and access the form here:
‘Self-Employed’ Agency Workers
In the past, some temping agencies tried to cut costs by avoiding PAYE. They did this by treating workers as ‘self-employed’, which meant the worker was responsible for paying their own tax and National Insurance to HMRC, and the agency avoided paying employer’s NIC.
While this might have looked attractive on paper, it often left workers exposed and unprotected, while also costing the government lost tax revenue.
To tackle this, rules were introduced to stop employment intermediaries (such as temping agencies and other businesses in the supply chain) from using this practice so easily. The rules state that PAYE must be operated unless the worker is under no supervision, direction, or control (or even the right of it) by any party regarding how they carry out their work.
This test also applies to agency workers in the construction industry. Although many already have tax deducted under the Construction Industry Scheme (CIS), PAYE should normally be used unless the worker clearly falls outside the supervision, direction, or control test.
Agencies must report to HMRC if they make payments without operating PAYE, along with details of the workers involved and the reasons why PAYE wasn’t applied.
It can sometimes feel tempting to accept self-employed treatment if offered — as it may seem like you take home more pay. But unless you are genuinely self-employed, this can create serious problems down the line with HMRC. The safest option is to insist on being paid through PAYE. If the business refuses, you may want to report them to HMRC so their practices can be investigated.
Practical Tips for Managing Your Tax as an Agency Worker
Because agency work often involves moving between different agencies and assignments, PAYE doesn’t always run as smoothly as it should. The good news is that there are a few simple steps you can take to reduce problems and keep your tax position under control:
Tell your agency when you’re leaving
Don’t assume that finishing an assignment automatically means your payroll record is closed. Let your agency know you’ve left and request your P45. If you don’t, the agency may keep you “on the books,” which could cause issues like:HMRC thinking you still have an open employment record.
Your new job being put on an emergency tax code, or even taxed at a flat 20% rate.
Keep in touch if you want to stay registered
If you haven’t worked for an agency in a while but want to remain on their books, check in with them occasionally. Agencies may issue a P45 automatically after a period of inactivity, following HMRC rules.Know your rights to a P45
Agencies sometimes delay issuing P45s because of the high turnover of staff. By law, they must give you a P45 as soon as possible after you finish work. Many now send these electronically, making it easier for you to get hold of it.Store your P45 safely
You only get one copy — employers cannot reissue duplicates if yours is lost. Keep it safe so you can pass it to your next employer without delay.Avoid unnecessary emergency tax
Without a P45 or starter checklist, your new employer may have to apply the emergency 20% tax code (known as code “0T”), even if you only have one job. You can avoid this by making sure you provide the right paperwork.If you work for more than one agency
Think about how your personal allowance is split. You can allocate it across jobs if needed, which may reduce the amount of emergency or higher-rate tax deducted.
Blog content is for information purposes only and over time may become outdated as the tax landscape is constantly changing, although we do strive to keep it current and up to date. It is written to help you understand your taxes and is not to be relied upon as professional accounting, tax and legal advice. For additional help please contact our team, or a professional adviser.