What is Employer's National Insurance and do I need to pay it?
Employer’s National Insurance is probably the most misunderstood tax in the contractor market and with new IR35 off-payroll rules turning one-month-old very soon, there is more confusion than ever over who pays it and why, writes Helen Christopher, operations director at contractor management firm Orange Genie.
Put simply, employers must pay Class 1 National Insurance in respect of their employees’ wages at the rate of 13.8% of earnings above the secondary earnings threshold. But how is this relevant to contractors, and which party in the supply chain is liable?
As an umbrella contractor you are an employee of your umbrella company. As such your umbrella is legally obliged to pay Employer’s NI (also known as Employer NI), along with other employment costs, and the company has to be able to fund those costs.
A compliant umbrella will agree an ‘assignment rate’ with your agency. This rate covers both your gross pay and the umbrella company’s costs. The agreed rate will include amounts for employment costs such as Employer’s NI, the Apprenticeship Levy, Auto-Enrolment costs, holiday pay, insurance, and the umbrella company’s margin.
In practice, your umbrella company charges your agency the assignment rate for the work you have carried out. They then ensure that all statutory employment costs are paid, and they retain a margin. The balance of the income is your gross pay, which is processed through usual PAYE systems and tax and Employee’s NI are deducted.
Unfortunately, where the reconciliation between the assignment rate and the contractor’s gross pay has not been adequately explained, contractors often mistakenly believe that they are being asked to pay the Employer’s NI, when in fact it is the umbrella company paying this from the monies they charge to agencies.
A good umbrella company will provide a full reconciliation alongside your payslip, clearly demonstrating how your pay has been calculated. Further transparency by umbrellas with regards to rates is also important and the introduction of Key Information Documents (KID) since April 6th 2020 sought to provide this. So your agency should share the KID with you ahead of each new assignment, so that you are clear on your expected take-home pay.
Limited company contractors
Fulfilling an assignment outside IR35, most contractors will structure their take-home as a combination of salary and dividends. As an employee of your own limited company your salary will be subject to Employer’s NI which your company will pay, and corporation tax relief can be claimed. No Employer’s NI is payable on the dividends.
If you operate an inside IR35 assignment through your limited company, the situation will depend on the size of your end-client. Where your end client is defined as “small” (the relevant criteria is here), you remain responsible for your own IR35 status assessments and the ‘old’ IR35 rules introduced in 2000 apply. You should treat all monies received by the company as deemed salary on which full PAYE tax and NI need to be paid. A 5% allowance can cover the administrative costs of running your business. In practice you will have to run a deemed salary calculation. This will take 95% of your invoice value as being the sum of your gross pay and Employer’s NI. Your company will then have to make payment of the Employer’s NI to HMRC through your usual payroll RTI submissions.
Where your end client is not “small,” the new off-payroll rules of April 6th 2021 apply. The party making payment to your limited company (the ‘fee-payer’) must deduct basic rate tax and Employee’s NI from your invoice value before settling. Relief for these amounts is available to avoid double taxation.
In this situation, the fee-payer is also required to pay Employer’s NI on the assignment rate. They are not permitted to deduct this from the sums paid to contractors. And as end-clients and agencies cannot afford to increase their costs on an assignment by 13.8%, we are seeing new assignment rates set below rates we may have previously expected, so that the total cost of the assignment (i.e. invoice value plus Employer’s NI) is in line with previous costs to fee-payers.
Employer NI? A simple levy, with far from straightforward application
In closing, the concept of Employer’s NI is simple but the application of the tax is far from straightforward. But in each and every case the individual contractor has not paid the Employer’s NI, it has either been the umbrella company or their limited company paying it. Yet to understand this fully requires a thorough appreciation of the model through which contractors operate and an appreciation of the potentially complex legal entities in the supply chain.