One of the most frequently asked questions by new umbrella employees is why they have to pay both Employers National Insurance (NIC) and the Apprenticeship Levy.

When a business wants to outsource their payroll responsibilities, associated administration and reduce their operating costs they will often utilise umbrella companies rather than place candidates on their own payroll.

When a contract worker uses an umbrella company for their payroll, the umbrella company is the employer, and the contract worker is the employee. The employer (Umbrella Company) doesn’t benefit from any work that is undertaken by the employee. This is because the employee is working for a different organisation (the end-client).

The Apprenticeship Levy (0.5%)

The Apprenticeship Levy (AL) is a government deduction that employers with an annual payroll of over £3 million are legally required to pay. The government asks for 0.5% of a company’s overall wage bill.

Umbrella companies have thousands of contractors on their payroll and this means that most meet this threshold. Consequently, the AL is passed on to their employees otherwise umbrella companies would make a loss and cease to exist.

The Assignment Rate

It may seem unreasonable to pass the Employer’s NIC and Apprenticeship Levy onto the contractor. However, Umbrella companies work to a very tight margin the business model is based on volume which is why they cannot pay the employment costs.

Recruitment agencies now offer different rates of pay for the same contracts meaning there will be a standard PAYE rate, and a higher rate advertised for umbrella the “Assignment Rate” the higher rate covers the additional employment costs.

All employers must pay employers national insurance, and it is illegal to deduct this from a worker’s income. That is one reason why compliant umbrella companies must always ensure that their employees understand the difference between the assignment rate and their gross pay.