Employment Status

Are you a contractor? If you work for someone else, it is important to know whether you are working for that person in an employed capacity or in a self-employed capacity as an independent contractor.

Your employment status will determine the charge to tax on income from your employment or self-employment. It will also determine the class of NICs, which are to be paid.

Umbrella Companies employ you for tax purposes and complete central returns for all their contractors. It's less hassle and more flexible for you but take home pay is typically less than that the limited company option.

The best option for you depends on your plans, 'one off' contract or 'contractor for life'? [Read More...]

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Contractors Pay Employers National Insurance

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

Because of various UK/EU employment laws, if you want to work as a contractor you must trade through a limited company (of one kind or another). Think of it simply as having limited company 'status'.

There are three legitimate ways to get limited company status.

  1. Setup and manage your own one-man limited company.
  2. Use an umbrella company service.
  3. Work through your recruitment agency.

Whichever of these 3 ways you choose to work, you will end up paying both Employee's NI and Employer's NI tax, one way or another.

Own Limited Company

When you work through your own limited company, the company pays you a salary via the standard PAYE method. Your pay-slip will show a deduction for Employee's NI but not Employer's NI, of course...but that's only half the story.

  • It is your own limited company that has to pay the Employer's NI tax.

So, both sets of NI tax are still paid by you, just accounted for in slightly different ways. You can't avoid paying Employer's NI by working through your own limited company.

Umbrella Company Service

Working through an umbrella company you become an employee. So how does the deduction for Employer's NI end up on your pay-slip?

It starts with the umbrella company (the employer) paying to HMRC Employer's NI in relation to your payments.

  • What the umbrella company does next is to claw-back exactly the same amount of money from you as they have had to pay to HMRC in respect of your Employer's NI.

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

So, technically, you do not pay Employer's NI - but a 'top-up' fee which is exactly the same amount as the Employer's NI.

 

It's a technical nicety, but explains why you have to pay ‘Employer's NI'.

and Through a Recruitment Agency

When you work through a recruitment agency, you are an employee of the recruitment agency (who is the Employer).

The recruitment agency quite correctly pays HMRC Employer's NI in relation to your (the employee's) payment.

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

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

Any Which Way

Whichever way you choose to work; your own limited company, umbrella company service or through an agency you will have to pay both Employee's NI and Employer's NI, one way or another. Sorry, but that's always been the deal.

You can use the contractor PAYE calculator here for an illustration of your take home pay from all possible contractor payroll solutions

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HMRC Compliance

It's the basics... Compliance with Tax, VAT, PAYE and fiscal arrangements is mandatory for contractors regardless of whether you use an umbrella company or your own limited company.

Incredible then that there are still rogue umbrella companies and limited company accountants who expose their contractors to fraud. Umbrella Compare provides THE solution, we thoroughly vet all umbrella companies and limited company accountants that we list [Read more...].

Umbrella Compare provides a holistic overview of contracting with the aim of helping new and old contractors find the right payroll solutions. Contracting should be about focusing on the contract, not payroll, accounting, HMRC and bureaucracy.