There can be a lot of confusion surrounding National Insurance for umbrella company contractors.
Due to the fact that the umbrella company is your employer, umbrella company contractors must pay National Insurance in a certain way which differs to how self-employed contractors and other employees will contribute.
To help clear up the confusion and get you on the right track, in this guide Umbrella Search outlines everything contractors need to know about paying National Insurance when working through an umbrella company.
How an umbrella company works
To understand how you should be paying National Insurance, it’s important to understand how an umbrella company works.
An umbrella company employs the contractor, meaning you are an employee of your chosen umbrella company.
As the contractor’s employer, the umbrella company will pay your salary through the pay-as-you-earn tax system, which deducts the correct levels of tax each month in line with how much you earn. Although the umbrella company is your employer, you will still work for your chosen client, on your chosen contract, and can work for several clients throughout the year if you choose.
Working through an umbrella company is an easy and stress-free way for contractors to continue to contract with clients of their choice and earn contractors' rates, but have the business and finance side of contracting which can be difficult to grasp, taken care of by the umbrella company.
This means that although you are free to choose which clients you work with and are responsible for finding your own work, the umbrella company will take care of certain tasks for you. These include invoicing the client on your behalf, processing any expenses incurred, ensuring you are covered by the correct levels or insurance, paying you a salary and ensuring tax and National Insurance are deducted, as well as providing you with benefits enjoyed by all employees including giving the contractor holiday pay, sick pay and maternity or paternity leave. You can read more about statutory benefits for contractors here.
National Insurance for contractors
Employee National Insurance
Now you know what an umbrella company is and how it will benefit you as a contractor, let’s look at how National Insurance works with this set up.
Like any other employee in the UK, as an employee of your umbrella company, you will pay employee's National Insurance on your pay.
As an employee of the umbrella company you have the right to a pay slip. This will outline everything that has been deducted from your salary, including National Insurance, so you can always check this.
Every contractor will contribute employee's National Insurance, however how much you contribute will depend on how much you earn which determines which National Insurance category you will fall into.
Employee’s National Insurance contributions are deducted from the contractor’s gross salary by the umbrella company, meaning that the contractor doesn’t need to do anything else.
Employer National Insurance
As well as paying National Insurance as an employee, umbrella company contractors will often be asked to pay Employer’s National Insurance too.
This can lead to a common misconception that you will therefore be paying National Insurance twice, however this isn’t the case, due to the fact that Employee National Insurance and Employer’s National Insurance are two different things.
We have outlined what Employee’s National Insurance is and what the current rates are in the last section of this article. So, what is Employer’s National Insurance?
Employer’s National Insurance is the contributions that employer’s make which are classified as secondary Class 1 contributions. Again, the amount that will be due will depend on how much the contractor earns and which category letter they fall under.
Why do umbrella company contractors pay both?
Every employer in the UK is legally bound to pay Employer’s National Insurance contributions on their employees’ earnings if it meets the right criteria.
This is true for an umbrella company too. However, in the case of an umbrella company things can become slightly confusing.
Due to the fact that the contractor is working for and being productive for the client, and not the umbrella company itself, and the client does not pay employer’s national insurance on behalf of the contractor as they are third-party, many umbrella companies will therefore pass on the cost of Employer’s National Insurance to the contractor.
Again, this will be visible on your payslip so you are always up to date with what deductions are coming off your salary. What’s more, should you ever require any help or assistance on matters such as National Insurance, the umbrella company is always there to guide you, acting as a helping hand and ensuring that everything runs smoothly.
Although this means an additional cost for the contractor, there are plenty of other benefits that come with working through an umbrella company as we have already outlined and you can read more about these here.
Now you know how National Insurance works when you contract through an umbrella company, the next step is to find an umbrella company that works for your contracting needs.
That’s where Umbrella Search can help
Here at Umbrella Search we’re here to help every contractor find the umbrella company that's just right for them. We know that different contractors require different things from umbrella companies, whether that's help with pensions or same day payments.
Our team are here to work closely with you in order to find you an umbrella provider you’ll love.
What’s more, we only ever work with umbrella companies we know and trust, so you can be safe in the knowledge that you’ll find the perfect match. To see how we can help kick start your journey to working with an umbrella company, simply reach out to the team today with and we'll get back to you as soon as possible.
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