Employers National Insurance Contributions
Many contractors want to know if their umbrella company will pay their employers national insurance (NI) contributions.
More than 200,000 British based contractors use umbrella companies. Those doing so are mainly those who feel they are inside IR35 or don’t want to risk an IR35 investigation. These can take years and can end up with the freelancer paying tens of thousands of pounds in back tax.
There are, also, other contractors who don’t want the admin and the hassle of running their own limited company. There are also some contractors who have been railroaded into umbrella companies by unscrupulous recruitment companies who get a ‘bung’ for each contractor they send to selected umbrella companies. This is illegal under the 2010 Bribery Act but it still happens.
Disguised Employees and Disguised Contractors
Every month the freelancer pays a fee to the umbrella company to do their admin for them. This includes their employers National Insurance.
The umbrella company is effectively the employer of the contractor. IR35 was created in 1999 to catch what the Government saw as ‘disguised employees’. Those were people who left permanent jobs at their companies on a Friday only to reappear on the Monday doing the same job for the same company in the same location. However, this time as a contractor.
This was beneficial both to the company and to the employee in tax terms. However, it was detrimental to the Treasury and the country. However, IR35 didn’t just catch these contractors. It caught many contractors in its net that had been contracting for years and who were not disguised employees.
Contractors as Umbrella Company Employees
So, it is a bit rum that many of those contractors have now become ‘disguised contractors’, masquerading as employees of the umbrella company. They pay PAYE tax and national insurance as if they were employees of the company when they are really contractors. Some of them even get holiday pay, sick pay, pensions and maternity pay.
How many companies do you know that charge their employees a monthly fee for paying them? The umbrella company is really a device so that freelancers can save themselves some tax.
The umbrella companies treat their ‘contractors’ as if they were employees when it comes to paying tax. However, the contractors are contractors any other way you look at them.
Umbrella Company Contractors Claiming Expenses
The big advantage for umbrella company contractors is that the company is able to claim expenses against tax for the contractor and refunds those expense deductions to them. These expenses can be for pension contributions, equipment they use in their work (like PCs) and fees for memberships of any trade bodies.
The umbrella companies do virtually everything for the contractor. All the contractor needs to do is send the umbrella company timesheets and any expenses claims. The umbrella company invoices the agency (or the client company if it is a direct contract), deducts PAYE tax and employee and employers National Insurance, adds back on the expenses tax claims, pays the contractor and pays HMRC.
So, the answer to the question of do umbrella companies pay employers national Insurance (NI) contributions is yes. However, it is really the contractor that pays it himself or herself. They deduct it out of the contractors’ earnings. For tax purposes, the contractor is just an employee of the umbrella company. The taxman treats him just like one.