There’s a lot of confusion regarding this topic. This confusion is mostly because of the lack of understanding or explanation regarding the assignment rate, gross pay and how Employers National Insurance is calculated. This leads to umbrella employees believing that they are paying the Employers’ National Insurance.
First and foremost, umbrella company employees are not legally liable to pay the Employers’ National Insurance (NI). As per the law, the employer must pay the Employers’ National Insurance and not the Employee.
If you are a temporary worker working through an umbrella company, your umbrella company becomes your Employer, thus making you, their Employee.
You may feel that you are contributing towards the Employer’s National Insurance and not your employer. This confusion is understandable and right to an extent. But that should not be the case.
If you are a Contractor/Temporary Worker looking for a fully compliant umbrella company, then have a look at our top umbrella companies page
To understand this better, you need to understand what makes an umbrella company your employer, and what are the deductions.
Let us take an example, if you were to work for a client directly and not through an umbrella company, in such a scenario your client would become your Employer. This means that they are legally liable to pay the Employers’ National Insurance taxes.
Things change when you choose to work through an umbrella company. In this case, you are not directly engaged by the client. Instead, it is your umbrella company that enters into the agreement with your client/agency. Thus, making the umbrella company your Employer.
Now that the umbrella company is your employer, the liability of Employers’ National Insurance (NI) is on the umbrella company, and not your client or the agency.
An umbrella company is legally liable to pay for employment costs, which include:
It is not the Contractor’s liability to pay for these employment costs, and any compliant umbrella company will factor these costs and include them in the assignment rate charged to the client/agency. The assignment rate includes both, umbrella company costs and your Gross Pay.
We have heard of instances when non-compliant umbrella companies illegally deduct these costs from the contractor’s gross pay. This should not happen at any cost, and it is exactly why we put emphasis on appointing a compliant umbrella company.
What is an assignment rate?
An assignment rate is a rate agreed upon between your umbrella company and your client/agency. This rate includes employment costs, umbrella margin and your Gross Pay.
Why is there a difference in pay rates offered to you?
You may see different rates being offered to you by your client. You may notice a lower rate offered to you. This happens if you want your client to pay you directly and not through an umbrella company. The rate is low because the client will be paying the Employers’ National Insurance Contributions and also it does not include umbrella company costs.
A higher pay rate is offered to you should you opt to work through an umbrella company. This higher pay rate is to cover the umbrella employment costs.
If you find that the rate difference between the two is more than 13.8%, then it is probably better for you to work through an umbrella company.
What is an umbrella company’s margin?
Umbrella company charges the agency an assignment rate for the work carried out by you. They then deduct and pay all the statutory employment costs. They retain a margin after paying the employment costs.
How much is Employers’ National Insurance Contribution?
For the tax year 2023/24, if your earnings are above £175 per week, £758 per month or £9,100 per year.
Employees’ National Insurance Contribution is set at 12% on earnings between £12,570 and £50,250 per year, and 2% on earnings above £50,250 per year.
Gov.uk link for reference: Find rates and thresholds for employers 2023 to 2024
A compliant umbrella company will provide you with a complete breakdown of costs and deductions in your payslip with an explanation to you of how your pay was calculated. We can’t stress enough how important it is for you to appoint a fully compliant umbrella company.
Employers’ National Insurance remains a point of confusion for many temporary workers. We hope our guide has helped you understand this and cleared your confusion.
Disclaimer
This article is for information purposes only. We strongly recommend taking professional advice or an expert opinion before reaching any conclusion. We have a team of experts who can help you with your queries, please feel free to review them. You can also write us an email at [email protected].