Employees’ number one query to many umbrella firms is, “Why am I paying employer’s national insurance contributions?” – we supply the solution and explain what other charges umbrella contractors are responsible for.
If you choose to work for a PAYE umbrella firm, you will become an employee of the company, and the umbrella will be your employer.
Employers’ National Insurance Contributions must be paid on all salaries paid to their employees by law. They are also required to pay a 0.5 per cent Apprenticeship Levy.
Many contractors wonder why they (as workers) must pay their employers’ NICs; the reason lies in the nature of the contract chain’s contractual connections.
Who is responsible for national insurance contributions paid by employers?
Your client would have directly hired you before you became a contractor, and they would have paid their employers’ NIC taxes. This is a pretty simple concept to grasp, and the tax implications are evident.
However, as a contractor, your client is not directly related to you (the contractor) because there is a middleman involved (the umbrella company).
The end-client or agency has a contract with your umbrella company, and you (the contractor) have a contract with the agency.
In this connection, the umbrella (not the customer) is your employer, and as such, is responsible for paying employment taxes.
And, obviously, the funds to meet any job-related expenses must come from somewhere. It must come from the fee charged by the umbrella firm to the end client in this situation.
What is the impact of employment costs on my contract rate?
Contractors should not be held liable for paying employment costs out of their pay checks.
Instead, the end-client is charged an assignment rate (which includes labour costs and the umbrella company’s profit margin), and the contractor is paid a specified pay rate – which should be agreed upon at the outset of the contract.
In a recent post, Julia Kermode, the FCSA’s chief executive, detailed how this works:
“All employers are required to pay employers national insurance, which cannot be deducted from a worker’s pay. One of the reasons why compliance umbrella firms make sure their employees understand the difference between the assignment rate and their gross compensation is because of this.”
Because there have been well-publicised incidents of non-compliant umbrella schemes improperly deducting employment taxes from workers’ gross income, you should strongly consider using only a compliant, reputable umbrella providers for your own safety and peace of mind.
In 2020/21, how much national insurance will be due on my rate?
Employers pay 13.8 per cent Class 1 NI on incomes over £169 per week (£8,778 per year).
Class 1 NI is charged at 12% of gross taxable wages between £183 and £962 per week (£9,500 and £50,000 per year) for employees, and 2% above this amount.
The complete list of NIC rates can be seen here.
Your umbrella company will get money from your agency or client for the previous period’s earnings. These wages should be a multiple of your hourly rate.
All employment costs (employers’ NICs, apprenticeship levy), as well as pension payments (if applicable) and holiday pay, are deducted from this income. This leaves you with your gross pay, which you will use to calculate your personal tax.
Employees’ NICs and income tax are deducted from your gross pay. The umbrella firm will deduct this on your behalf, and you will be left with your net salary.