What you need to know about the National Insurance rise

What is National Insurance?

Paying National Insurance (NI) is mandatory as soon as you reach 16-years-old and you’re either an employee earning above £184 a week, or self-employed and taking home £6,515 or more a year.

Paying these contributions means that you will qualify for the state pension, as well as other benefits such as maternity allowance and bereavement support payments.

Why are the NI rates going up?

Starting from the 6th of April 2022, NI will increase by 1.25%.

With the pandemic having such a detrimental effect on the National Health Service, these additional payments will be spent on helping the NHS to recover, as well as funding the UK’s health and social care.

The changes are temporary, lasting for one year until the 5th April 2023, at which point the NI rates will go back to the previous rates but the increase will be shown separately on payslips as the ‘Health and Social Care Levy’.

It will affect those who pay the following NI contributions:

• Employer Class 1
• Employee Class 1
• Class 1A
• Class 1B
• Class 4

How will the NI changes affect umbrella company contractors?

These changes will have an impact on those employed by an umbrella company.

The main rate for employees is due to rise from 12% to 13.25%, and the amount you’ll be charged will all depend on how much you earn.

Although there were some self-employed workers who were eligible for financial help during the pandemic (such as the SEISS grants), there were many who were left out and so these NI increases will come as yet another blow to the sector.

For umbrella company contractors especially, there’s not only the employees NI rise to take into consideration, but also the increased costs that will come from their umbrella company’s overheads (due to the company paying out more for inflated Employer NIC).

This is just another expense to the umbrella contractor, much like the Apprenticeship levy that was introduced in 2017 – a tax payable by all companies with an annual wage bill in excess of £3m. Read our page Umbrella Company Tax Explained for more information on why umbrella company contractors pay this type of tax.

Unfortunately, these additional charges will result in umbrella company contractors seeing a reduction in their take home pay, unless of course clients and agencies uplift the assignment rates to cover these increased costs.

Despite this, there are still many positives to contracting through an umbrella company, such as:

Being entitled to standard employee benefits

Being employed by your umbrella company means that you’ll benefit from some of the security that permanent employees have. So, unlike sole traders and limited company contractors, you are entitled to statutory maternity/paternity and sick pay, as well as annual leave.

Flexibility

A better work-life balance is something that the majority of us strive for and this is most definitely a highlight for those who choose to become self-employed.

As a contractor you will often find that you are paid a higher daily/weekly/monthly rate compared to salaried employees, yet you will also have the freedom to pick and choose when you work.

Not having to worry about completing a self-assessment tax return

A sole trader and limited company contractor will need to file all of their financial information and pay for owed tax on an annual basis before the 31st January of each year.

As an umbrella company contractor, this is all sorted for you by your umbrella company – they will provide you with a payslip, deducting any income tax or National Insurance Contributions (NICs).

For more information on this, read our Should I use an Umbrella Company? page.

We hope you found this page helpful. Our team of experts are available to answer any queries you may have, so give us a call on 01206 591 000 or email sophie.lewis@contractorumbrella.com.