Why Should I have to Pay Employers National Insurance

...as well as Employee's National Insurance!

What's the biggest gripe a contractor has about their payments from an umbrella company? The most common irritation is that the contractor thinks that the umbrella company deducts both Employee's National Insurance AND Employer's National Insurance from the their payments.

This is wrong, the contractor is mistaken. Contractors don't pay employer's National Insurance, that would be against the law.

Does Every Contractor Pay Both Employee's and Employer's NI?

For an individual to work as a contractor in the UK, the individual must trade through a limited company.

There are only three legitimate ways for a contractor to trade through a limited company:

1. Setup, manage and be legally responsible for their own individual limited company.
2. Use the services of an umbrella company (a limited company), and let them deal with all the hassles and paperwork.
3. Work through their recruitment agency (a limited company), and be financially worse off compared to the other two methods."

Whichever of these three ways a contractor chooses to work, they will end up paying both Employee's NI and Employer's NI tax, one way or another.

Own Limited Company

If a contractor works through their own limited company, they will not escape paying the Employer's NI tax.

When a contractor works through their own limited company, their company pays them a salary via the standard PAYE method. Their pay slip will show a tax deduction for Employee's NI but not Employer's NI...but that's only half the story.

•  It's the contractor's own limited company that has to pay the Employer's NI tax for the payment.

So, both sets of NI tax are still paid by the contractor, just accounted for in a slightly different way. The contractor can't avoid paying Employer's NI by working through their own limited company.

Services of an Umbrella Company

If a contractor works through an umbrella company (a limited company), they will not escape paying Employer's NI tax.

When a contractor works through an umbrella company, they become an employee of that umbrella company. As an employee, they accept having to pay Employee's NI. So how does the deduction for Employer's NI end up on the contractor's pay slip?

It starts with the umbrella company (as the employer) quite correctly paying, to HMRC, Employer's NI in relation to the contractor's (the employee's) payments.

• However, what the umbrella company does next, is to claw back exactly the same amount of money from the contractor, as they have had to pay to HMRC in respect of the Employer's NI.

If the umbrella company is charged £150 in Employer's NI when they pay a contractor, the umbrella company will simply charge the contractor an extra £150, over and above the standard processing fee, to compensate and make sure they are not out of pocket.

So, technically, the contractor does not pay Employer's NI - but they pay a 'top up' fee to the umbrella company, which is exactly the same amount as the umbrella company is charged by HMRC, in respect of Employer's NI.

• The umbrella company just call that part of their fee ‘Employer's NI' on the pay slip, because it's easier and quicker to explain.

It's a technical nicety, but explains why the contractor has to pay ‘Employer's NI'.

Through a Recruitment Agency

If a contractor works through a recruitment agency, they will not escape paying Employer's NI tax.

When a contractor works through a recruitment agency, the contractor is an employee of the recruitment agency (who is the Employer).

The recruitment agency quite correctly pay, to HMRC, Employer's NI in relation to the contractor's (the employee's) payment.

• And, like an umbrella company, the recruitment agency claws back exactly the same amount of money from the contractor, as they have had to pay to HMRC in respect of the Employer's NI for the contractor's payment.

However, the recruitment agency does this in a subtly different way. Instead of clawing back the money from the pay slip, the recruitment agency reduces the initial hourly/daily rate of the contractor by exactly the same amount as HMRC charges them in Employer's NI.

Whichever way the contractor chooses to work, whether it's their own limited company, via an umbrella companyor through a recruitment agency they will have to pay both Employer's NI and Employee's NI, one way or another.

 1. What is contracting and how can I become a contractor?
 2. You've got the contract, what now?
 3. What is an umbrella company?
 4. Umbrella company myths
 5. Umbrella company FAQs
 6. Umbrella company paperwork
 7. Umbrella company expenses
 8. Calling an umbrella company
 9. 10 questions to ask your umbrella company
10. IR35
11. Paying Employer's National Insurance
12. Choosing an umbrella company
13. Umbrella company alternatives