contractor national insurance

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Introduction 

When you’re a limited company contractor, how do you pay your contractor National Insurance Contributions (NIC) while UK contracting in 2024/25? NI is a tax for contractors when you run your own business. Therefore, when do limited companies pay National Insurance contributions (NICS), and how do contractors pay national insurance? As a UK business owner, you should be aware of paying limited company National Insurance as part of your contractor taxation. This guide will review National Insurance for contractors and explain how you pay this to the tax office. When you’re a UK contractor, you’ll usually have your own company and pay yourself a contracting salary as part of your overall contractor limited company take-home pay. Therefore, let’s delve into what to pay for your contractor wages and how your business will pay your contractor limited company NI contributions (UK).

In this guide, we’ll look at how NI works when you pay yourself a contractor salary (UK). In addition, we’ll look at how you pay NI as a contractor and how to pay National Insurance for self-employed. NI is a contractor’s tax, which you’ll pay on your salary when working as a contractor (UK) and running your own company. Different classes of National Insurance (UK) exist between employment, self-employment, and voluntary contributions. Therefore, regarding the business structure of how you work, National Insurance for the self-employed is calculated differently to contractors (UK) who are employees of their limited company. As a contractor, when running your own UK company, you can choose a salary level, and this is a contractor benefit (UK). Therefore, please read on to find out more regarding paying NI contributions.

Initial thoughts on contractor National Insurance 

Common questions 

As a contractor, some queries which may arise on limited company NI contributions and income tax include:

  • Do contractors pay tax?
  • Do contractors pay less tax?
  • How much tax will I pay as a contractor?
  • As a contractor, when do I pay taxes?
  • How do I pay tax as a contractor? 
  • Why do I pay employer’s NI as a contractor? 

In this guide, we’ll look at these and discover the employee’s and employer’s NI rates for 2024/25. 

Further common questions arise from UK business owners around how much NI I pay. Indeed, other questions usually concern how NI works and when you should pay it. Therefore, some examples of such questions will include:

  • Who pays National Insurance?
  • What is employer’s National Insurance?
  • How much is employer’s NI?
  • How much NI do employers pay?
  • What is employer’s NI?
  • Who pays employer’s National Insurance?
  • How much NI should I pay?
  • How much is employer’s NI contribution?
  • What is the lower earnings limit?
  • Who pays class 4 National Insurance?
  • How to pay NI?

Therefore, this guide will look at who pays NI, how NI works, the UK NI rates, and how much NI you pay as a UK contractor.

What is NIC?

First, NIC is a form of contractor self-employment tax in the UK and a deduction against earned income in the UK. Second, NIC is payable on UK salaries and UK self-employed profits. When you are employed, there are both employee NI rates and employer’s NI rates. We’ll look at these in detail later in this guide. Therefore, NI is part of your contractor taxes when you run a business.

How do you pay contractor NIC?

How will you pay your contractor National Insurance (UK) when you pay yourself a contractor’s salary in 2024/25? If you’re IT contracting (UK), your company will pay you an IT contractor salary. As a result, when your company pays you this, you’ll pay NI contributions when your salary is above the level where NI kicks in. It may incur an employee’s NI; however, above the level where NI kicks in, it’ll incur an employer’s National Insurance contribution.

As a UK contractor or freelancer, you should be aware of your UK NI contributions while working. This is because paying NI contributions throughout your working life affects 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’ve got your own contracting company, it can pay you a director’s salary. You may ask how much NI an employer pays, and do I have to pay employer’s National Insurance? The limited company National Insurance is payable on your salary as one of your self-employed contractor taxes. In addition, if you employ anyone else, such as paying your spouse a salary, they may pay NIC on their salary.

Contractor income tax (PAYE)

Besides employee NIC being a self-employed contractor tax, PAYE income tax is another contractor tax that may be deductible from a director’s or employee’s salary. Basically, these taxes (contractor PAYE and NIC) are deducted from the gross salary to arrive at the net pay.

Income tax for contractors in the UK in 2024/25 is payable on your salary if it’s more than £12,570 per annum. This amount is the current level of the personal allowance.

Other guides

Besides this guide on contractor limited company NI contributions, we have, for ease of reference, written about:

  • The filing dates for official documents and tax payments.

Contractor National Insurance contributions (limited company) 

First thoughts

How do contractors pay national insurance, and how much is employer’s national insurance and the employee’s NI? A business will pay employee and employer NI contributions over a certain level; we will explain these later.

When your company pays salaries, it must operate a contractor PAYE scheme. Basically, this can be done via the HM Revenue & Customs (HMRC) website. Alternatively, your PAYE for contractors’ scheme can be done more efficiently through specialist payroll software or an online digital platform like FreeAgent. 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 contractor National Insurance rates for employees and employers are now back to where they were before the change. A further change in April 2022 was the NI threshold was aligned with the personal allowance for 2023/24. Moreover, this change has stayed in place in 2024/25 and will remain so.

What are the UK classes of National Insurance?

The amount of National Insurance you’ll pay depends on what type of NI you’re paying. In the UK, there are four main classes of National Insurance:

Class of NI Who pays it
1 Employees and employers pay this.
2 You pay this if you’re self-employed.
3 These are voluntary contributions.
4 You pay this if you’re self-employed and have profits over a certain level.

 

National Insurance for contractors -employee and self-employed

How do contractors pay national insurance? As a UK business owner, you’ll pay contractor National Insurance (limited company) through your monthly or weekly salary if you’re an employee.

On the other hand, how do you pay National Insurance when self-employed? When we consider how to pay National Insurance when self-employed, in 2024/25, you’ll pay NIC under the following National Insurance classes:

  • Firstly, Class 2 NI can be paid weekly if your annual profits are under £6,725 and you would like access to contributory benefits, including the state pension.
  • 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.

Your NI payments (UK), whether in employment or self-employment, will help you build up your entitlement to certain state benefits. Indeed, these include the State Pension and the Maternity Allowance.

The basic history of NI 

The NI system originally came out to protect employees during 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 the NI system is an additional tax.

Main aspects around National Insurance for contractors 

UK NIC earnings limits 2024/25 

Your contractor limited company NI contributions (UK) 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). The NIC Lower Earnings Limit for 2024/25 is set at £533 per month or £6,396 per annum. In addition, benefits will begin to accrue NI credits at this level for the employee’s state pension.
  • The Secondary Threshold (ST) applicable to employers is set at £758 per month or £9,100 per year in 2024/25.
  • The Primary Threshold (PT) for employee NI contributions is set at £1,048 per month or £12,570 per annum for 2024/25.
  • The Upper Earnings Limit is set at £4,189 per month or £50,270 per year for 2024/25.
  • There is no upper earnings limit for employer’s NI.

What are the National Insurance rates for 2024/25?

When we consider how much is Class 1 National Insurance, the UK NI rates for limited company NI contributions in 2024/25 are:

  • 8% employee NI contribution for income between the primary earnings threshold and the Upper Earnings Limit. The NI rate for employees was 10% from 6 January 2024 to 5 April 2024; before 6 January, it was 12%.
  • 2% employees NI for income over the upper earnings limit.
  • An employer’s National Insurance rate of 13.8% above the employer’s National Insurance threshold. This employer NI rate applies to all salary income over the employer NI threshold (the secondary threshold) for Class 1 National Insurance and Classes 1A and 1B.

The contractor National Insurance rates for employees shown above are the present rates. With the reduction in employee NI rate in January 2024, an average worker on £35,400 will receive an NI cut in 2024/25 of over £450.

There are different employee and employer NI rates for those under 21, apprentices under 25, freeport workers, etc. Therefore, on the HMRC website, you can find the complete list of employee and employer National Insurance rates for 2024/25.

What is UK Contractor NI 2024/25? 

In 2024/25, when considering limited company National Insurance for contractors:

  • A contractor must pay the employee’s NI contribution at 8% on income above the Primary Threshold.
  • The company is paying employer’s National Insurance at 13.8% on income above the employer’s NI threshold (Secondary Threshold).

The employee NI contribution of 8% 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 £50,284. Indeed, salary earnings above £50,270 are where the employee’s NI contribution rate will reduce to 2%. The employer’s NI contribution rate remains at 13.8% above this level.

As a side note, a director of a contractor company will pay limited company National Insurance when their salary exceeds the NI threshold. This is because directors only pay NI once they reach the threshold. In comparison, employees pay NI monthly or weekly, depending on their earnings.

More thoughts on UK contractor NI

Contractor National Insurance -for UK contractors with their own company 

If you’re working through your own company, you’ve more flexibility in terms of what you take as your contracting pay. This is the case for all individuals who run their own IT contractor companies or other contracting companies. Indeed, this flexibility is when you compare it to a regular employee or umbrella company worker. Basically, most contractors with their own company pay a small salary, which incurs minimum National Insurance contributions. However, even though this pay level is just above the contractor salary threshold for NI, it still counts as a qualifying year for state pension purposes. What’s more, this salary level will result in a small amount of limited company NI contributions to pay each year (a few hundred pounds).

Importantly, when we consider how contractors get paid, besides the take-home pay from their salary, they’ll take the rest of their income as dividends (there’s 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’ll pay your contractor National Insurance contributions based on this. However, these limited company National Insurance contributions are enough to count as a qualifying year for the full state pension when you retire.

You now need 35 qualifying years throughout your working life to entitle you to the full state pension at retirement age. However, the rules here are somewhat complex. Therefore, please see the HMRC website for guidance on the new state pension and your National Insurance record.

Employment allowance

In April 2014, a new Employment Allowance (EA) came into play. Initially, this was set at £2,000. On 6 April 2016, HMRC increased this to £3,000. Then, on 6 April 2020, it was increased to 4,000; on 6 April 2022, the Employment Allowance 22/23 increased to £5,000. Further, the Employer’s NI Allowance 2024/25 is still £5,000.

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. If you’re a company director, you’ll need two paid employees to qualify, each earning above the Secondary Threshold (£9,100 per annum). However, the allowance is also available if you only have one employee who is not a director. 

Class 1A National Insurance 

When we consider contractor National Insurance in the UK, if you’re an employee and your employer provides you with benefits, the employer will pay Class 1A NIC on those benefits. The Class 1A NIC rate in 2024/25 is 13.8%.

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 -how does Self-employed NI work?

First thoughts

When you’re self-employed, you may pay income tax and Class 2 and Class 4 NICs, depending on your earnings. Regarding income tax, you’ll pay this if your total taxable income (from self-employment and other sources) exceeds your personal allowance of £12,570 per year. In terms of NI, first, the self-employed pay Class 4 NI at a UK NI rate of 6% through their Self-Assessment Tax Return on profits between £12,570 and £50,270 and 2% above £50,270 per annum. Second, they may pay the Class 4 NI weekly rate of £3.45 if they earn under £6,725 per annum and would like access to the state pension (see below).

2024/25 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 6%
Class 4 NICs above the Upper Profits Limit 2%

What are the self employment changes in 2024/25? 

From 2024/25, the key changes for self-employed individuals are:

  • Class 2 NI changes:
  • Those with profits above the lower profits limit (£12,570) will no longer be required to pay Class 2 NIC. They will continue to get access to the State Pension through an NI credit without paying NIC.
  • Those with profits between £6,725 and £12,570 will continue to get access to contributory benefits, including the State Pension, through a National Insurance credit without paying NICs.
  • Those with profits under £6,725 and others who pay Class 2 NICs voluntarily to get access to contributory benefits, including the State Pension, will continue to be able to do so. The rate continues at £3.45 per week for those who wish to contribute.
  • Secondly, the government reduced the main rate of Class 4 self-employed NICs from 9% to 8% on 6 January 2024. A further decrease to 6% took place on 6 April 2024.

Comment

It’s worth noting that very few IT contractors work as self-employed. Therefore, most contractors today operate through their own company and pay their contractor National Insurance through this. Moreover, working this way gives extra credibility to clients and recruiters, particularly those in high-end industries.

Consider voluntary NI contributions 

In 2024/25, you can make voluntary Class 3 NI contributions of £17.45 per week. You may do this where you’re not currently paying NI. This may be the case if you aren’t presently contracting and there’s not enough profit in your company to pay a salary. As a result, you may like to make up your NI credits for one reason or another. Indeed, it may be the case you’d like to do this if you’re getting towards retirement age. If you have any NI questions, you could post them on the HMRC community forums, and someone from HMRC will come back to you. 

Final thoughts

This guide covers how self-employed, employee, and employer National Insurance 2024/25 works and what to consider. We’ve also looked at the employee and employer NI rates for 2024/25 and the relevant thresholds. In addition, we’ve looked at voluntary contributions and when you might decide to make them.

As a final thought on National insurance for contractors, while working, you pay into the NI system throughout your working life. Indeed, paying the required amount of limited company NI contributions on your contractor’s salary each year ensures you receive a qualifying credit each year. Over your working life, you need to pay the minimum NI for the required number of years to qualify for your full state pension when you reach retirement age. Therefore, while you’re UK contracting, it’s a good idea to take your contractor’s pay at such a level where you incur contractor National Insurance. As a result, you’ll receive NI credits for each tax year and move closer to the number of qualifying years.

Furthermore, as far as the future goes though, who knows how much the state pension will be worth when you retire? Therefore, investing in a range of other areas may be wise. These could include personal pensions, savings, rental properties, and other investments to build extra income for the day you retire.

Finally, please see the National Insurance section of the HMRC website. It certainly provides detailed information on how the NI system functions.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2024 / Categories: Company Taxes, First timer guide, Tax Guides /

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