If you’re a contractor or agency worker, and have signed up to an umbrella company, you may be wondering why you’re paying employers’ national insurance contributions (NICs) on your earnings.
The short and simple answer is you’re not paying an employers’ NIC.
To understand why that’s the case, though, we have to dig a little deeper.
How umbrella income works
When you join an umbrella company, you should become an employee of that umbrella company.
Though you have the freedom to work through the umbrella company for your agency or clients as you see fit, whilst doing so, you remain an employee of the umbrella company. This brings with it certain legal obligations for the umbrella company as an employer.
There are costs to the umbrella company of employing you. Employment overhead costs can include pension contributions, holiday pay, and employers’ NIC contributions and the umbrella will also usually retain a small margin from the assignment income in order to cover their own costs. These overhead costs arise when you earn and are the costs of employing you (“Costs of Employing You”). These Costs of Employing You need to be covered. When you work for an agency or client, the umbrella company issues an invoice which should cover your wages, (as agreed between you and the umbrella company) and the Costs of Employing You. This is the assignment income.
It is important to understand that the assignment income is not your gross pay, it is your pay plus the overhead Costs of Employing You.
Sometimes this causes confusion and it is all too easy to misunderstand your actual pay rate. This is one reason why Key Information Documents are now required to be given to all agency workers to bring some clarity regarding pay rates.
Employment overhead costs can include pension contributions, holiday pay, and employers’ NIC contributions. The umbrella will also usually retain a small margin from the assignment income in order to cover their own costs.
The balance after the deductions have been made is your gross pay. Check back to your Key Information Document that your agency should have issued to you; your pay calculations should be explained there.
Why has employers’ NIC become such an issue for umbrellas?
Though a good umbrella will lay out the Costs of Employing You before you sign up with them, the NIC question appears to be a hot-button issue that many agency workers need clarifying.
Why, though? Often a client will need a someone to work for them at short notice, and in that case it is easy to see how the detail of pay rates can be overlooked, especially as it isn’t immediately obvious.
Some workers have felt that no-one properly explained their pay calculations and indeed they might have been told that the assignment rate is actually their gross pay.
In this situation it is understandable that the worker will perceive that they are paying employers’ NICs, and this has naturally brought scrutiny from trade bodies and unions.
The latter in particular were especially concerned about the possibility of unlawful deductions, i.e. that the umbrella might be wrongly taking money from an individual’s gross pay.
In the vast majority of scenarios that simply isn’t the case. As we’ve highlighted, a contractor’s status with an umbrella is that of an employee, and any deduction for an employers’ NIC is separate from their gross pay.
A good umbrella company will be fully transparent regarding how pay is calculated at the outset. Indeed, agencies are now legally obliged to give their workers Key Information Documents (KIDs) which also outline the same.
Click here to learn more about Key Information Documents.
NICs and the wider ‘supply chain’
To come full circle, as an agency worker or an umbrella employee, the fact remains that employers’ NICs are legally required to be paid in relation to your remuneration.
Whichever entity in the supply chain pays you, whether it is the end-client, agency or umbrella, it will incur the employers NICs as an additional cost of payroll.
By virtue of the end-client sourcing your services via an agency, all overhead costs incurred should have been factored into the cost of providing your services. The umbrella usually declares these costs for transparency purposes, however they will have been incurred even if you were due to be paid by the agency or end-client directly.
So, as an agency worker, while you aren’t paying the employers’ NIC out of your gross pay, the contribution should be charged to, and come from your end-client, i.e. the business that you are undertaking work for.
This portion of the assignment income is then used to satisfy the employers legal obligations to pay employers NIC, pension contribution and Apprenticeship Levy to HMRC, and does not come from your gross pay.