Recruitment agencies and organisations that engage with temporary workers tend to favour umbrella companies over placing their candidates on their own company’s payroll.
This allows them to outsource payroll responsibilities and associated administration, while reducing their own operating costs.
Employer’s National Insurance is not an additional charge created by umbrella companies. It is an employment cost built into the assignment rate, which umbrella workers ultimately fund as part of the overall contract rate.
An umbrella company’s sole responsibility is to process its clients’ payroll (PAYE) compliantly and efficiently.
While the processes involved are relatively straightforward, first-time umbrella users often have questions about the procedures involved and the deductions on their payslips.
One of the most frequently asked questions by new umbrella employees is why they are responsible for both the Employer’s National Insurance Contributions (NIC) and the Apprenticeship Levy.
This article will explain why these employment costs are deducted from umbrella workers’ pay.
Employer’s National Insurance (15%)
When a temporary worker uses an umbrella company for their payroll, the umbrella company becomes the employer, and the temporary worker becomes the employee.
In this arrangement, the employer does not benefit from the work undertaken by the employee, because the employee is working for a separate organisation (the end client).
As a result, umbrella companies are not in a position to cover Employer’s NIC, because they do not benefit from the work completed by their clients.
The organisations benefiting from the work being carried out are not technically the employers in the supply chain, and neither is the recruitment agency.
Therefore, the Employer’s NIC is passed on to the temporary worker.
Current employer and employee NI rates (2026/27)
Employers’ Class 1 NICs – 15% on earnings above £9,100 per year.
Employees’ Class 1 NICs – 8% of your gross taxable pay between £12,570 and £50,270 per year, and 2% above this amount.
A complete list of NIC rates is available here.
The Apprenticeship Levy (0.5%)
The Apprenticeship Levy is a government charge that employers with an annual payroll of over £3 million are required to pay. The rate is 0.5% of the company’s total wage bill.
Many umbrella companies have thousands of contractors on their payroll, which means most of them are liable for the levy.
Consequently, the cost is passed on through the assignment rate — otherwise, umbrella companies would operate at a loss.
Just like Employer’s NIC, the assignment rate for umbrella workers should take this deduction into account. If you have concerns that your rate does not cover it, speak with your recruitment agency or client.
The assignment rate
At first glance, it may seem unreasonable to pass these costs on to the worker. However, recruitment agencies typically offer different pay rates depending on how you are engaged.
In most cases, there will be a standard PAYE rate and a higher rate advertised for umbrella working. This higher rate is designed to cover employment costs such as Employer’s NIC and the Apprenticeship Levy.
If you are a contractor or freelancer working through an umbrella company, you benefit from PAYE employment, but you are also responsible for these employment costs via the assignment rate.
As a result, you should always confirm with your recruitment agency (or client, if no agency is involved) whether these costs have been factored into the rate offered to you.
It is common for temporary assignment rates to be higher than equivalent permanent salaries, and covering Employer’s NIC and the Apprenticeship Levy is one reason.
Julia Kermode, Chief Executive at the Freelancer & Contractor Services Association (FCSA), summarised the position in a recent article:
All employers must pay employers national insurance, and it is illegal to deduct this from a worker’s income. That is one reason why compliant umbrella firms always ensure that their employees understand the difference between the assignment rate and their gross pay.
The assignment rate includes employment costs such as employers’ national insurance, holiday pay, apprenticeship levy, and pension contributions. Such costs should always be factored into the assignment rate because, as employers, umbrellas are legally obliged to pay them.
Umbrella companies only make a small margin
The only income compliant umbrella companies generate for themselves is via their margin (fee), which is typically charged weekly, fortnightly or monthly.
The margin is applied each time an umbrella employee is paid and covers administrative costs, internal staff salaries, and normal business expenses.
Other than the margin, all deductions that appear on an umbrella company payslip are paid directly to HMRC through PAYE.
Catching up with someone in the industry
We asked Ciaran Woodcock, Head of Field Sales and Marketing at Churchill Knight Umbrella, to share his thoughts:
Employers NI and the Apprenticeship Levy are deductions that are required to come out of the assignment rate that a temporary worker negotiates with their agency or client. There is a common misconception that umbrella companies are being unreasonable by passing these costs on. However, as our employees don’t work for us and we simply process payroll in exchange for a small margin, we’re not able to cover them.
The assignment rate is different to the deemed salary because it includes employment costs such as Employers NI and the Apprenticeship Levy. This is why agencies often provide an uplift when contractors use an umbrella.
If a client challenges these costs, we advise them to speak to their agency or client and confirm whether the assignment rate reflects them.
We are transparent about these deductions from the outset and provide example payslips during onboarding.
Some general advice to find the right umbrella company
Woodcock also offered some general advice:
It frustrates me to see misleading articles suggesting umbrellas are unfairly charging workers. The only income compliant umbrellas generate is their margin. Because umbrellas don’t benefit from the work undertaken, they cannot absorb Employer’s NI or the Apprenticeship Levy.
I would urge every contractor to do their research. Look for an umbrella company that is a member of the FCSA and one with a strong reputation.
And do not be tempted by tax avoidance schemes. Promises of taking home 80% of your income may sound attractive, but the consequences from HMRC can be severe.
