Why Umbrella Contractors Pay Employers’ NI

Why am I paying Employers’ National Insurance as an umbrella contractor?

Picture this: you secure a contract through an agency, are told you have to work via an umbrella company, and then spot a deduction on your payslip labelled “Employers’ National Insurance”—and it's coming out of your overall pay. Frustrating, right? If you’re scratching your head about why you’re footing this bill, you’re not alone. Let’s unpack what’s really going on behind those deductions, and what you can do about it.

The Basics: What is Employers’ National Insurance (NI)?

National Insurance is a UK tax paid by both employees and employers to fund public services like the NHS, state pensions, and more. For most PAYE employees, the cost of Employers’ NI is hidden—your employer pays it on top of your gross salary.

But as a contractor through an umbrella company, you’re in a different ballpark:

• The agency or end client pays a rate (the assignment rate) to the umbrella company.
• The umbrella deducts Employers’ NI (and their margin, holiday pay, apprenticeship levy, etc.) before calculating your gross pay.
• What’s left is what you see as your taxable earnings.

Why Is It Set Up This Way?

The root cause is the way agencies and clients negotiate pay rates:

1. The client sets a budget for the work.
2. The agency takes a cut and passes the rest to the umbrella as the assignment rate.
3. The umbrella then uses this rate to cover all statutory deductions before paying you.

"The 'assignment rate' includes allowances for all costs, meaning the umbrella does not pay Employers’ NI from its profits—it deducts it from your assignment rate."

This isn’t illegal or even unique—it’s industry standard. But it’s confusing, and sometimes feels unfair.

Table: How Pay Breaks Down Under an Umbrella Company

What Does This Mean for Your Take-Home Pay?

• You don’t get to keep the full assignment rate. Significant portions go to deductions before you even see your payslip.
• Your actual pay may look lower than a permanent employee’s gross salary, even when the assignment rate is higher.

"Contractors are left with a sense of déjà vu—doing the same work as full-timers but watching more of their pay vanish on the way to their bank account."

Can Anything Be Done?

It might not seem very just, but there are steps you can take to protect yourself and ensure transparency.

1. Understand Your Pay Rate

• Always ask agencies: “Is this the assignment rate or my actual pay rate?”
• Request a pay illustration, breaking down all deductions.

2. Negotiate from a Position of Knowledge

• Knowing the true cost to you means you can negotiate meaningfully.
• Push for higher assignment rates to offset umbrella deductions.

3. Demand Transparency

• Good umbrella companies offer clear, itemised payslips.
• If something doesn’t add up, challenge it!

4. Explore Alternatives

• For some, working through a limited company (if outside IR35) may be more tax-efficient. Professional advice is essential here.

Essential Takeaways

• As an umbrella contractor, Employers’ NI is deducted from your assignment rate before your pay is calculated.
• This is standard practice, but contractors often don’t realise the full extent until they check their payslips.
• Demanding clarity, negotiating assignment rates, and understanding your deductions are critical to maximising your financial wellbeing.

Be your own advocate. Ask questions, demand explanations, and don’t be afraid to shop around for umbrella companies committed to transparency.

If you found this helpful, consider sharing it with other contractors. Have questions about umbrella pay or want to see more guides? Reach out—let’s demystify contracting together.