The National Insurance hike and what it means for contractors
Boris Johnson recently announced a 1.25% increase in national insurance contributions in the UK for both individuals and businesses. But what impact will this have on contracting professionals who are employed by an Umbrella Company?
All workers across the UK will be affected by the increase to their personal NI rate which will shift from 12% to 13.25%. For an annual salary of £20,000 this means an extra £130 per year. For a £50,000 annual salary an additional £505 per year.
While most will agree that we need to do something to reform health and social care across the UK, umbrella company employees will take a double hit if their daily rate is not increased accordingly.
Why will Umbrella Company workers be further affected?
The impact on those employed by an umbrella company could see a further reduction in their take home pay due to the nature of the employment arrangement. When a contractor seeks work through a recruitment agency (who outsource employment and payroll to an intermediary Umbrella Company) they see an advertised daily or hourly “Limited or Umbrella” rate. Often it is not made clear that this advertised rate also includes additional deductions which must be paid over and above the usual Employee deductions for tax, national insurance, and pension contributions.
In fact, when the invoice total is paid across by the recruitment agency to the intermediary, who employs the worker, the total amount received needs to cover the ‘Employer’ costs. These being Employer’s national insurance, Employer’s pension, and the apprenticeship levy. As the Employer the intermediary is obliged to deduct these employer items prior to arriving at a gross pay amount which is then available for payroll and is subject to the standard employee deductions.
From a contractor perspective, if the rate has not been correctly explained, it appears that they are paying two amounts for national insurance: Employee NI (currently 12%) and Employers NI (currently 13.8%).
People Group’s response
Here at People Group we’d like to see the end client rate increase to cover the additional Employer NI in line with other businesses that will be subject to the increase. It remains to be seen whether that will happen. As it currently stands, an umbrella worker will perceive an increase of 2.5% on NI payments when the new rules apply in April 2022, due to the way their payments are calculated.
Other factors to consider
It’s also important to note that additional factors do impact on the rates received by contractors. After 12 weeks in the same temporary assignment under the provisions of the Agency Worker Regulations “comparator pay” applies and this means that the contractor’s pay should match that of a directly employed person doing the same job. Therefore as the Hirer would be paying the Employer’s additional NI contributions for directly employed staff, the daily rate for contractors should be increased to take account of this to ensure that the contractor receives the same gross daily pay as their directly employed comparator.