Why do umbrella company contractors have to pay Employer’s NI costs?

Recruitment agencies and organisations engaging with temporary workers tend to favour umbrella companies rather than placing their candidates on their own company’s payroll. Why? It allows them to outsource their payroll responsibilities, associated administration and reduce their operating costs.

The sole responsibility of an umbrella company is to process the payroll of its clients (PAYE) in a compliant and efficient way. 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 Employers 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 (13.8%)

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 doesn’t benefit from any work that is undertaken by the employee. This is because the employee is working for a different organisation (the end-client).

As a result, umbrella companies are not in a position to cover the Employer’s NIC because they are not benefitting from any of the work completed by their clients.

The organisations that are benefitting from the work being carried out are not technically the employer in the supply chain, and neither is the recruitment agency.

Therefore, the Employer’s NIC is passed on to the temporary worker.

Current rates of Employer’s National Insurance (2023-24 tax year):

Employers’ Class 1 NI – 13.8% on earnings above £175 per week (£9,100 per year).

Employees’ Class 1 NI – 12% of your gross taxable pay (10% from 6th Jan 2024) between £12,570 – £50,270 per year), and 2% above this amount.

A full list of NIC rates is available here.

The Apprenticeship Levy (0.5%)

The Apprenticeship Levy (AL) is a government deduction that employers with an annual payroll of over £3 million are legally required to pay. The government asks for 0.5% of a company’s overall wage bill.

As you can imagine, many umbrella companies have thousands of contractors on their payroll and this means that most of them are eligible for AL contributions. Consequently, the AL is passed on to their clients – or else umbrella companies would make a loss and cease to exist.

Just like the Employer’s NIC, the assignment rate for umbrella company workers should take this 0.5% deduction into account. If you have concerns that your rate does not cover it, please speak with your recruitment agency or client.

The Assignment Rate

Initially, it may sound unreasonable to pass the Employer’s NIC and Apprenticeship Levy onto the worker. However, recruitment agencies have started to offer different rates of pay for the same assignments.

Typically, there will be a standard PAYE rate, and a higher rate advertised for umbrella working. This is done to cover the employment costs that umbrella workers are liable for.

If you are a contractor or freelancer who has been asked to work through an umbrella company, there are many benefits available to you. However, you will be responsible for both Employers NIC and Apprenticeship Levy.

As a result, make sure you speak with your recruitment agency (and client – if there is no agency) and ask if this has been taken into account within the rate being offered to you.

It is no secret that rates for temporary assignments are usually higher, and covering the Employer’s NIC and AL for umbrella clients is one of the reasons for this.

Julia Kermode, Chief Executive at the Freelancer & Contractor Services Association (FCSA), has summarised the situation 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 pensions 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 it covers administrative costs, internal staff salaries and usual business expenditure.

Other than the margin, all deductions that appear on an umbrella company’s payslip is paid directly to HMRC (PAYE).

Umbrella Company Partners

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 on Employers NI, Apprenticeship Levy and the importance of transparency within the supply chain of temporary workers.

“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 and unfair by passing these employment costs on. However, as our employees don’t work for us and we simply process their payroll in exchange for a small margin, we’re not able to cover them.

My role involves speaking with dozens of recruitment agencies every week. Thankfully, a majority understand the role of the umbrella company. Any agency advertising a position which requires the use of an umbrella company will mention the rate of pay. This “rate of pay” is the assignment rate. The assignment rate is different to the deemed salary because the assignment rate will have the Employers NI and the AL to take into consideration. This is why a majority of recruitment agencies will provide their candidates with an uplift if they use an umbrella for their payroll. In fact, it is not uncommon for agencies to offer different rates for the same role – depending on the payroll method.

If a client ever challenges us about these employment costs, we urge them to speak to their agency or client and to find out if the employment costs have been taken into consideration within their rate of pay.

We never hide the fact that our clients are required to cover the Employers NI and AL. We make a conscious effort to let them know about these employment costs during the initial enquiry stage, and throughout the onboarding process. We even send newly registered clients an example payslip before we pay them for the first time.”

Some general advice to find the right umbrella company

Woodcock also has some general advice for contractors looking to sign up with an umbrella provider:

“It frustrates me to read so many misleading and inaccurate articles online accusing umbrellas of stealing from their clients and refusing to cover costs that ethically we should. The only income compliant umbrellas generate is from the margin they charge to deliver their service. This margin covers administration, internal staff salaries, business costs, and more. Because umbrellas don’t benefit from the work undertaken by their clients, they simply cannot afford to take responsibility for the Employers NI and the AL. If they did, they would make a loss from day one.

I would urge every contractor to do their research before deciding whether or not they’re happy to use an umbrella for their payroll. Don’t be misled by propaganda that is most likely being posted by other payroll companies.  They’re probably just frustrated at the sharp rise in demand for umbrellas!

Look for an umbrella company that is a member of the FCSA and one that has an excellent online reputation. And whatever happens, do not be tempted to use a tax avoidance scheme. The idea of taking home upwards of 80% of your salary may sound tempting, but it could result in life-changing repercussions from HMRC. Using these schemes isn’t worth the risk.”

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Last updated: 19th January 2024