Contractors' Questions: How is NIERS calculated?

Contractor’s Question: Thanks to the guide yesterday on NIERS, I finally know what this HMRC payment on my payslip is! But how is NIERS actually calculated?

Expert’s Answer: To answer your question, let’s take an example.

Consider a contractor who is inside IR35 and paid through an umbrella company (as an employee of the umbrella company). The contractor’s agreed assignment rate is £500 per day.

One rate, a few names it's known as

If the contractor works for 5 days a week, their gross ‘assignment rate’ (or 'contract rate' as HMRC describes it), or invoice value, to the agency is £2,500 (£500 x 5 days).

This will be subject to employment costs before the taxable salary is reached, and will then be subject to Employee’s NICs and PAYE.

Then the umbrella calculates the Employer’s National Insurance on the gross taxable salary after deducting the weekly secondary threshold of £170 from the earnings.

Where the fun starts

This is where the fun starts! The umbrella must now use a reverse calculation to work out the NIERS as they are unaware of what the taxable salary is.

As a normal employee the taxable salary is obvious and therefore the 13.8% can simply be applied to that over the thresholds, and this is where umbrella payroll is more complex than standard PAYE calculations.

A numerical example

So let’s take a look:

Invoice Value: £2,500.00

SUBTRACT NIERS: £278.19 (N.B. As mentioned, umbrellas typically do a reverse calculation with the help of software, in a sort of back and forth that calculates what the actual figure for NIERs would be, so the £278.19 is 13.8% of the taxable salary over the threshold).

SUBTRACT APPRENTICESHIP LEVY: £10.93

SUBTRACT UMBRELLA MARGIN: £25.00

Taxable Salary Remaining: £2,185.88 (the part that the 13.8% NIERs is based on over the thresholds)

SUBTRACT PAYE: £632.55

SUBTRACT EMPLOYEE NICs: £118.34

Final (final!) NET Pay: £1,434.99.

The expert was Lucy Smith, managing director of Clarity Umbrella.