National insurance is a compulsory contributory system of social security in the United Kingdom.
The NICs system is used to pay for a number of different benefits, including unemployment benefits, sickness and incapacity benefits, maternity allowance, paternity allowance, adoption allowance, child benefit and bereavement benefit.
The recent increase in national insurance contributions by the government has caused quite a stir among businesses and individuals alike. The Chancellor announced that both employees as well as self-employed folks will be seeing an extra 1.25% added onto their NICs. The increase will equally apply to Employer’s NICs.
Employees of UK umbrella companies are going to be hit with a double whammy if their daily rate isn't increased accordingly. So, as an employee working through an umbrella, you should be aware of the potential financial implications that come with an increased National Insurance rate.
How will it affect contractors?
Well, there were few contractors who could leverage the SEISS grant and furlough scheme offered by the government but there were many left out and those will have to face more because of this increase.
For umbrella contractors particularly, there is not just the employee NI ascend to think about, yet additionally, the increased costs that will come from their umbrella organisation's overheads (as they will be paying Employers NIC).
This is simply one more cost to the umbrella contractor similar to the Apprenticeship levy that was presented in 2017.
Unfortunately, this means that contractors may see their take-home pay reduced. The good news is if clients and agencies enhance the assignment rates to mitigate these increased costs then it's possible for them not to be as badly hit financially in an already difficult industry climate where competition has been fierce.
Jason Medcalf (a freelance specialist) explains:
“We often find, particularly for those new to contracting, that a clear explanation of their advertised daily rate is not provided initially. A contractor sees a rate of £150 per day and assumes that for a 5-day week they’ll have a payslip for £750 less deductions for tax, Employee’s NI, and Employee’s pension contributions. However, on receipt of their first payslip, they’ll see the Employer deductions.”
Still, contracting through an umbrella company can be a great option for many reasons:
Increased Tax Efficiency - One of the key benefits of contracting through an umbrella company is that you can take advantage of their tax efficiency. An umbrella company will help you to minimise your tax liability and maximise your take-home pay.
Reduced hassle and administration - Another key benefit of contracting through an umbrella company is that you can reduce the amount of hassle and administration you have to deal with. An umbrella company will deal with all the paperwork for you, so you can focus on your work.
Flexibility & Security - It can provide you with greater flexibility in terms of how you work – you can choose your own hours, for example. Finally, it can offer you greater security, as you will have an employment contract with the umbrella company rather than with the individual client.
To sum up:
"It's no surprise to see Boris Johnson announce a rise in National Insurance rates. The coronavirus pandemic has wreaked havoc on the UK's economy. However, what is disappointing is the impact this will have on contractors, freelancers and temporary workers. Yet again, it seems as if the government hasn't considered the UK's temporary workforce at all." said Andrew Trodden of Umbrella Company UK.
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