Dear Contractor Doctor,
I've just started contracting and have registered with an umbrella company.
I would like to know if, as a contractor with an umbrella company, I am supposed to pay both the employee and employer NI contributions?
Contractor Doctor says:
Firstly, well done for taking the plunge into contracting!
Your question is a good one, and the topic of NI payments is one that many first time contractors need to address.
In terms of NI payments you must pay both Employers and Employees NI however you decide to structure you financial affairs. However, there are ways to mitigate the amount of NI you pay depending on your IR35 status.
If you are caught by IR35 then you will pay full Employers and Employees NI on all your earnings since you are effectively forced to pay all the salary via PAYE. Whether you decide to join an umbrella scheme or form your own limited company makes no difference to NI payments.
If you use any umbrella scheme you will be forced to pay full amounts for Employers NI and Employers NI since 'composite umbrella' schemes are not viable - they were legislated against in the 2007 Budget as part of the Managed Service Company Legislation.
If you are not caught by IR35 and use a limited company you can receive payments via a small salary and dividends which significantly reduces the amount of Employers NI and Employees NI that you pay. The recommended amount for a directors salary is around £5,000 net per annum.
The article 'Limited Company or Umbrella: Deciding on a Payment Structure' will advise you on how to structure your financial affairs.
In terms how your IR35 status will affect your income use the IR35 Calculator
Good luck with your contracting career!