Umbrella Companies & Employers NI
Umbrella Companies and Employer’s National Insurance Contributions (NIC)
Under the PAYE system two types of National Insurance are charged against an individual’s earnings: employee’s national insurance contribution and employer’s national insurance contribution. If you are a permanent employee you must pay the employee’s NIC and your employer will have to pay the employer’s portion. However, if you are paid through an umbrella payroll company it is you (the contractor) who has to pay the employer’s NIC as well as the employee contribution on your contractor income. You may ask why you would want to incur this extra cost. Well, as a contractor you can benefit from being able to command a higher rate of pay that will more than offset the additional cost.
The current rate of employer’s NIC for the tax year 2010/11 is 12.8%. This is payable on all earnings above £110 per week or £476 per month with NO upper limit. It is therefore imperative that you negotiate a higher rate of pay with your agency or end client to allow for a minimum of 12.8% above the normal rate for a permanent employee. If you agree to a rate that is the same or less than you would be paid as a permanent employee, you would end up with less take home pay!
Just to clarify the position:
To benefit from being paid through an umbrella payroll company you must make sure that you secure a rate of pay that is at least more than 12.8% above the rate paid to permanent employees. This will ensure that you take home more pay, as you are entitled you to claim legitimate business expenses against your income which you would not be able to do if you were a permanent employee on PAYE.