Contractors who are new to working with an umbrella company will undoubtedly have all kinds of questions. Many of those are about their payslip.

It is important to remember that when you decide to undertake a contract via a Pay As You Earn (PAYE) umbrella company, you essentially become an employee of the company. This means the company will treat you as such, making them liable for payments and arranging employment taxes.

Everything from income tax to other employment costs, such as adhering to National Minimum wage and processing holiday pay, will all be sorted on your behalf. But what about National Insurance?

In this post, we’ll discuss the ins and outs of umbrella company National Insurance, including the different types and how it’s covered.

What is an umbrella company?

First of all, you will want to fully understand what an umbrella company is and how they can be beneficial for you as a contractor. An umbrella company can provide a multitude of fantastic advantages for freelancers and contractors looking to ease their administrative load and reduce and concerns surrounding tax.

In short, a contractor would seek out an umbrella company if they are looking for assistance in tasks such as processing timesheets, providing payroll and organising invoices.

The company will serve as an intermediary between a contractor and their client. They will handle a lot of organisational duties that are important to a contactor but can be very time consuming and easy to let slip when the work begins to mount up.

Working with the umbrella company, you will need to provide them with timesheets showing the number of hours of work you have completed for your clients. In return, they will provide you with a net salary that automatically deducts national insurance contributions and income tax in a stress-free way.

Using an umbrella company also means you’re free from IR35 worries, which is a considerable benefit in anybody’s books.

What are the different types of National Insurance?

Being paid by an umbrella company means that, more often than not, you will pay National Insurance as both an employer and an employee.

It is quite common for people who work through an umbrella company to think that they are paying twice for the same thing. But in reality, this is not true and is instead down to confusion about how an umbrella company works.

But what is the difference between the two types of national insurance?

Employer’s national insurance

Employers pay ‘secondary’ Class 1 National Insurance contributions (NICs) on their employees’ earnings. The amount payable depends on how much the employee earns and their National Insurance category letter.

Employee national insurance

The employee contribution is deducted from gross wages by the employer, with no action required by the employee. The employer then adds in their own contribution and remits the total to HMRC along with income tax and other statutory deductions.

Why will you be paying both?

By working with an umbrella, you will be seen as an employee, meaning you have to pay employee’s NI. However, this also means the umbrella company will then have to pay employer’s National Insurance, meaning they face additional costs by working with you. As a result, they pass the costs onto you as the employee, so they don’t lose out.

This model is typically the same for most umbrella companies because they are all required to comply with the regulations which surround PAYE and would be at a loss by paying employer’s NI.

How are employment costs displayed on an umbrella payslip?

An umbrella company will receive payment for your last period’s earnings from your agency or client.

National Insurance and all other employment costs such as apprenticeship levy, pension contributions and holiday pay will be deducted from the total income leaving the employee with a gross pay figure.

Following this, the individual pays employee’s National Insurance and income tax which is handily deducted on behalf of the umbrella company, leaving a net pay figure.

Is an umbrella company right for you?

There are many contributing factors for a contractor to consider when deciding if umbrella companies are suitable for them and their work. A crucial first step is to decide on why you are considering a contracting career as this will be a good indicator as to whether you should liaise with an umbrella company.

Are you keen to be independent and look forward to managing your own finances? Or, would you rather focus on the work that matches your skillset? Are you motivated by the opportunity to have a hands-on approach to all aspects of your day to day work or do you crave a better work/life balance?

Financial considerations are also a primary reason for deciding to work with an umbrella company. It is a huge benefit for many individuals to have the comfort of statutory benefits and the opportunity to circumnavigate IR35 as a contractor.

If you do choose to go down the route of an umbrella company, it should go without saying that you must research the company’s history. This is so that you have a full understanding of what you are getting yourself into. Be aware of their fee structure, payment frequency and any other possible benefits such as insurance they may be able to offer you.