Umbrella Company National Insurance
Navigating the intricate landscape of UK tax legislation is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: Umbrella Companies. But how does the umbrella company National Insurance work?
In this comprehensive guide, we delve deep into the heart of umbrella companies. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to empower you with the knowledge to make informed decisions and remain compliant.
What is National Insurance?
National Insurance Contributions (‘NICs’) are a tax on earnings paid by employees, employers and the self-employed. They help to build your entitlement to certain benefits, such as the State Pension and Maternity Allowance.
As an umbrella company employee, you’re subject to Class 1 NICs and liable for both the Employer’s and Employee’s payments owed to HMRC.
Umbrella Company National Insurance
Two types of NICs are payable by contractors:
i) Employee Contributions
Employee NICs are calculated at 8% of taxable income between the primary threshold of £12,570 per year, the upper secondary threshold of £50,270 per year, and 2% of any earnings above that. The employee’s NICs are paid directly to HMRC via the PAYE process; no administration is involved for the contractor.
ii) Employer Contributions
Employer NICs are calculated at 13.8% of taxable income above the secondary threshold of £9,100 per year. The umbrella company will deduct the employer’s NICs from the contract assignment income, the amount invoiced and received from the end client.
Employer's National Insurance
When a contractor signs up with an umbrella company, the umbrella company becomes the employer and the contractor the employee. In this relationship, the umbrella company provides a payroll service to the contractor; however, they don’t benefit from any work performed during the contract. As a result, umbrella companies are not in a position to cover the employer’s NICs.
The end client is the organisation benefiting from the work, although they are not technically the employer in this supply chain. Therefore, the employer’s NICs are passed on to the contractor.
There is a common misconception that umbrella companies are being unreasonable by passing these employment costs on; however, they have no choice. As contractors don’t work directly for the umbrella company, the umbrella company cannot afford to cover the required deductions.
It’s important to remember that your umbrella company is not retaining or profiting from these deductions; they are sent directly to HMRC. The margin charged covers the cost of processing payroll.
The Apprenticeship Levy
The Apprenticeship Levy is a small tax levied on UK employers to fund new apprenticeships. All employers with annual pay bills of £3m or more must pay the Levy at 0.5% of the company’s total wage bill, minus a fixed £15,000 yearly allowance.
For contractors, your umbrella company is your employer, and it must, by law, pay all employment taxes based on income generated by its employees. Umbrella companies pay these statutory employment costs from the funds received from your agency or end client. As the apprenticeship levy is one of these statutory costs, it will appear on your payslip alongside other statutory costs, such as the Employer’s National Insurance.
Employment costs, such as employer’s NICs and the Apprenticeship Levy, are why rates for Inside IR35 roles are usually higher than those for Outside IR35. End clients try to consider these deductions.