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Introduction
When you are a limited company contractor, how do you pay your contractor National Insurance Contributions (NIC) while UK contracting in 2023/24? Notably, when we consider do limited companies pay national insurance and how do contractors pay national insurance, as a UK business owner, this is something that you need to know. When you are a UK contractor, you will usually have your own company therefore let’s delve into how your business will pay your contractor limited company NI contributions.
Initial thoughts on contractor National Insurance
What is NIC?
Firstly, NIC is a form of tax in the UK and a deduction against earned income in the UK. Secondly, in the UK, NIC is payable on UK salaries and UK self-employed profits.
How do you pay contractor NIC?
Therefore, how will you pay your contractor National Insurance in 2023/24? When you are a UK contractor or freelancer it is important to be aware of this as your UK NI contributions affect your future entitlement to the UK state pension when you retire.
Your director salary
In summary, when we look at National Insurance for contractors and you have your own contracting company, it can pay you a director’s salary. You may ask how much NI does an employer pay and do I have to pay employer’s National Insurance? The limited company National Insurance will be payable on this as one of your contractor taxes. In addition, if you employ anyone else, such as your spouse, they may also pay NIC on their salary.
Income tax (PAYE)
Besides employee NICs, PAYE income tax is another one of your contractor taxes which may also be deductible from a director’s or employee’s salary. Basically, these taxes (PAYE and NIC) are deducted from the gross salary to arrive at the net pay.
Contractor National Insurance contributions (limited company)
What to consider first
How do contractors pay national insurance and as part of this how much is employer’s national insurance and employee’s NI? A business will pay both employee and employer NI contributions over a certain level and we explain these later.
When your company pays salaries, it needs to operate a PAYE scheme. Basically, this can be done via the HM Revenue & Customs (HMRC) website. Alternatively, this can be done more efficiently through specialist payroll software or an online digital platform such as FreeAgent. Notably, most limited company contractors and small business owners will appoint a specialist contractor accountant to look after this for them.
In April 2022, there was a bit of a shake-up in the Spring Statement 2022. Employee and employer’s National Insurance Contributions (NIC) rates were increased by 1.25% after being set at the same levels for many years. However, these were later reverted and the NI rates for employee and employer are now back to where they were prior to the change. A further change in April 2022 was the that the NI threshold was also aligned with the personal allowance (£12,570 in 2022/23 and 2023/24). What’s more, this change has stayed in place and will do going forward.
Other guides
We have also, for ease of reference, written about:
- The filing dates for official documents and tax payments.
National Insurance for contractors -employee and self-employed
How do contractors pay national insurance? As a UK business owner, you will pay contractor National Insurance (limited company) through your monthly or weekly salary if you are an employee.
On the other hand, if you are self-employed, in 2023/24 you will pay NIC as follows:
- Firstly, Class 2 NI is payable weekly at a flat rate of £3.45.
- Secondly, Class 4 NI is payable as a percentage of your self-employed profits.
HMRC will work out both elements of self-employed NI as part of the Self-Assessment tax return submission process.
As an aside, in 2023/24, you can make Class 3 voluntary NI contributions of £17.45 per week. You may do this where you are not currently paying NI, perhaps if you are not working yet you would like to make up your NI credits as you are getting towards retirement age.
Your NI payments, whether in employment or self-employment, will help you build up your entitlement to certain state benefits. Notably, these include the State Pension and the Maternity Allowance.
In the UK in 2023/24, income tax is payable on your salary if it is more than £12,570 per annum. Basically, this amount is the current level of the personal allowance.
As a side note, a contractor company will pay limited company National Insurance when the salary exceeds the NI threshold. In comparison, employees pay NI monthly or weekly, depending on their earnings.
The basic history of NI
The NI system originally came out to protect employees during times of illness and unemployment.
In recent years, however, NI Contributions have raised an increasing proportion of the total tax receipts by the government treasury. Consequently, many people now think that the NI system is an additional tax.
Other considerations around National Insurance for contractors
NIC earnings limits
Your contractor limited company NI contributions in terms of employee and employer National Insurance contributions apply to salaries as follows:
- Employers are required to start reporting earnings above the National Insurance lower earnings limit (LEL). Basically, the NIC lower earnings limit 2023/24 is set at £533 per month or £6,396 per annum. Therefore, at this level, benefits will start to accrue for the employee’s state pension.
- The primary threshold (PT) for employee contributions is set at £1,048 per month or £10,570 per annum for 2023/24.
- The upper earnings limit is set at £4,189 per month or £50,270 per year for 2023/24.
- The secondary threshold (applicable to employers) is set at £758 per month or £9,100 per year in 2023/24. However, there is no upper earnings limit for employer NIC liabilities.
NIC rates
The rates for limited company NI contributions in 2023/24 are:
- 12% employee NI for income between the primary threshold and the upper earnings limit.
- 2% employees NI for income over the upper earnings limit.
- An employer’s National Insurance rate of 13.8%. This employer NI rate applies to income over the lower earnings limit for Class 1 National Insurance and Classes 1A and 1B.
As mentioned, the above NI rates were all increased by 1.25% from 2022/23, however the government later reverted on these increases. However, during the 2022/23 tax year, the rates of NI above are a mixture of the two rates i.e., the employer NIC rate was effectively 14.53%.
Contractor NI
In 2023/24, when considering limited company National Insurance for contractors:
- A contractor will be liable to pay the employee’s NI at 12% on income above the primary threshold.
- The company will be paying employer’s National Insurance at 13.8% on income above the lower earnings limit.
The employee NI of 12% is payable on a weekly salary between £242 and £967. In addition, employees’ NI at 2% is payable on a weekly wage above £967.
These weekly limits equate with annual salary levels of £12,584 and £50,270. Indeed, salary earnings above £50,270 are where the employer’s NI rate will reduce to 2% and there is no employee’s NI above this amount.
What else to think about
Contractor National Insurance -for UK contractors working through their own company
If you are working through your own company, you have more flexibility in terms of what you pay yourself. This flexibility is when you compare it to a regular employee or umbrella company worker. Notably, most contractors with their own company pay a small salary just above the NI threshold. This will result in a small amount of limited company NI contributions to pay each year.
Importantly, besides the take-home pay from their salary, they will take the rest of their income as dividends (there is no NI on dividends). This is part of our handy tax tips for UK contractors and small business owners.
If you pay yourself a contractor salary just above the NI threshold, you will pay your contractor National Insurance contributions based on this. However, these limited company National Insurance contributions will be enough to count as a qualifying year for the full state pension when you retire.
Throughout your working life, you now need 35 qualifying years to entitle you to the full state pension at retirement age. However, the rules here are quite complex. Therefore, please see the HMRC website for more guidance on this.
Employment allowance
In April 2014, a new Employment Allowance (EA) came into play. Notably, this was initially set at £2,000. On 6 April 2016, HMRC increased this to £3,000. What’s more, on 6 April 2020, it was increased to 4,000, and on 6 April 2022, the Employment Allowance 22/23 increased to £5,000. Further, the EA is now £5,000 in 2023/24.
The allowance effectively refunds the employer’s NICs element of the limited company NI contributions to the employer, up to the value of the EA each tax year. You will need two paid employees to qualify, each earning above £12,570 per annum.
Class 1A National Insurance
When we consider contractor National Insurance in the UK, if you are an employee and your employer provides you with benefits, the employer will pay Class 1A NIC on those benefits. The Class 1A NIC rate is 13.8% (14.53% in 2022/23 due to the mixture of rates as mentioned earlier).
Notably, the Class 1A NIC on the benefits is payable annually. after the end of the tax year (5 April), and the due date is 19 July.
Contractor National Insurance -Self-employed NI
When you are self-employed, you will pay income tax and NICs when you earn above a certain income each year. Firstly, in terms of paying NICs, the self-employed pay a flat weekly charge of £3.45 per week for Class 2 NI if their profits are above the small profits threshold (SPT) of £12,570 or more a year. Secondly, they also pay Class 4 NI at 9% through their Self-Assessment Tax Return on profits between £10,570 and £50,270 and 2% above £50,270 per annum.
| 2023/24 thresholds & rates | |
|---|---|
| No NI incurred between | £0 to £12,570 |
| Small profits threshold for Class 2 NICs | £12,570 |
| Lower profits limit for Class 4 NICs | £12,570 |
| Upper profits limit | £50,270 |
| Class 2 NICs | £3.45 per week |
| Class 4 NICs up to the upper profits limit | 9% |
| Class 4 NICs above the upper profits limit | 2% |
It is worth noting that very few IT contractors will work as self-employed. Therefore, most contractors today operate through their own company. What’s more, when you work this way, it gives extra credibility to clients and recruiters, particularly those in high-end industries.
Final thoughts
As a final thought on National insurance for contractors, when you pay into the NI system throughout your working life this is key. Indeed, when you pay the required amount for at least the correct number of years while you work, you will qualify for your full state pension when you reach your retirement age. While you are UK contracting, it is a good idea to take a salary at such a level where you will receive NI credits for each and every tax year, if you haven’t already achieved the maximum number of qualifying years.
Furthermore, as far as the future goes, though, who knows how much this will be worth when you retire? Therefore, it may be wise to look to invest in a range of other areas. These could include personal pensions, savings, rental properties, and other investments to build extra income for the day you retire.
Finally, please see the NI section of the HMRC website. Certainly, this gives detailed information on how the NI system functions.
Link to Contractor Advice UK group on
