The number one question many umbrella companies are asked by their employees is: “why am I paying employers’ national insurance contributions?” – here we provide the answer and explain what other costs are payable by umbrella contractors.
If you decide to undertake a contract via a PAYE umbrella company, you become the employee of the company, and the umbrella is your employer.
By law, all employers must pay Employers’ National Insurance Contributions on the salaries paid to their employees. In addition, they must also pay a 0.5% Apprenticeship Levy.
Many contractors ask why they (as employees) have to pay employers’ NICs – the answer lies in the nature of the contractual relationships in the contract chain.
Who is liable for employers’ national insurance?
Before you became a contractor, your client would have employed you directly, and they’d pay their employers’ NIC taxes. This is very simple to understand, and the tax liability is obvious.
As a contractor, however, your client is not directly linked to you (the contractor), as there’s an intermediary in the way (the umbrella company).
Your umbrella company has a contract with the end-client or agency, and you (the contractor) have a contract with the agency.
The umbrella (not the client) is your employer in this relationship, and therefore is liable to pay employment taxes.
And clearly, the money to cover any employment costs has to come from somewhere. In this case – it must come from the rate charged by the umbrella company to the end client.
How are employment costs factored into my contract rate?
Contractors must not be liable to pay employment costs from their wages.
Instead, an assignment rate is charged to the end-client (which factors in employment costs and the umbrella company margin), and the contractor should be paid a specific pay rate – which should be agreed before the start of the contract.
Julia Kermode, FCSA’s chief executive, explained how this works in a recent article:
“All employers must pay employers national insurance, and it is illegal to deduct this from a worker’s income. That is one reason why compliant umbrella firms always ensure that their employees understand the difference between the assignment rate and their gross pay.”
“The assignment rate includes employment costs such as employers’ national insurance, holiday pay, apprenticeship levy, and pensions contributions. Such costs should always be factored into the assignment rate because, as employers, umbrellas are legally obliged to pay them.”
There have been well-publicised cases where non-compliant umbrella schemes have illegally deducted employment taxes from workers’ gross pay so you are strongly advised only to use a compliant, trusted umbrella company.
How much national insurance is payable on my rate in 2022/23?
To fund the new Health & Social Care Levy, NIC rates rose by 1.25 percentage points from April 2022. This increase was then reversed from 6th November onwards! So the current rates are in (italics).
- Employers’ Class 1 NI is charged at 15.05% (13.8% from Nov 6th 2022) on earnings above £175 per week (£9,100 per year).
- Employees’ Class 1 NI is charged at 13.25% (12% from Nov 6th 2022) of your gross taxable pay from £190* – £967 per week (£9,880* – £50,270 per year), and 3.25% (2% from Nov 6th 2022) above this amount.
* The Primary Threshold (where you start paying Employee’s NI) is £9,880 per year / £190 per week from 6th April 2022 to 5th July 2022. This rose to £12,570 per year / £242 per week from 6th July 2022 onwards.
You can access the full list of NIC rates here.
How are employment costs displayed on my umbrella payslip?
Your umbrella company will receive payment for your last period’s earnings from your agency or client. These earnings should be a multiple of your assignment rate.
All employment costs are deducted from this income (employers’ NICs, apprenticeship levy), together with pension contributions (if applicable), and holiday pay. This leaves you with the gross pay figure upon which you will pay personal tax.
You (as an employee) pay employees’ NICs and income tax on your gross pay. This will be deducted on your behalf by the umbrella company, and you will be left with your net pay.
For a worked-through example of how net pay is calculated, read our article on umbrella company payslips.
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