There is often confusion surrounding this topic, primarily due to a lack of understanding or explanation regarding the assignment rate, gross pay, and how Employers' National Insurance is calculated. This leads umbrella company employees to believe they are responsible for paying Employers' National Insurance.
First and foremost, umbrella company employees are not legally liable to pay Employers' National Insurance (NIC). By law, it is the employer's responsibility, not the employee's.
If you are a temporary worker working through an umbrella company, your umbrella company becomes your employer, making you their employee. Therefore, the responsibility for paying National Insurance Contributions (NIC) lies with the umbrella company.
You may feel that you are contributing towards the Employer’s National Insurance and not your employer. This confusion is understandable and, to an extent, correct. However, that should not be the case.
To understand this better, you need to know what makes an umbrella company your employer and what the deductions are.
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 they would be 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, your umbrella company enters into the agreement with your client or agency, making the umbrella company your employer.
Now that the umbrella company is your employer, the liability for Employers’ National Insurance (NI) rests with the umbrella company, not your client or 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 into the assignment rate charged to the client or agency. The assignment rate includes both the umbrella company costs and your gross pay. The pay rate offered to you should be uplifted to cover these employment costs; otherwise, you will end up with a lesser take-home pay. You need to discuss this at the time of accepting the contract.
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 exceed £175 per week, £758 per month, or £9,100 per year, the Employers' National Insurance Contribution will be 13.8%.
Employees’ National Insurance Contribution is set at 8% on earnings between £12,570 and £50,270 per year, and 2% on earnings above £50,270 per year.
For example, if your income is £52,270, you will pay nothing on the first £12,570. Then, you will pay 8% on the income between £12,570 and £50,270, and 2% on the remaining £2,000, which results in a total of £3,056.
National Insurance Contribution (NIC) update - Autumn Budget 30/11/2024
The following updates will take effect from April 2025:
Gov.uk link for reference: Find National Insurance Contribution (NIC) rates and thresholds.
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].
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