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 2023/24? Basically, 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, paying limited company National Insurance is something you should be aware of as part of your contractor taxation. This guide will go over National Insurance for contractors and explain how you pay this to the tax office. Basically, 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 you’re working as a contractor (UK) and run your own company. In the UK, there’s different classes of National Insurance (UK) between employment, self-employment and voluntary contributions. Therefore, when it comes to the business structure of how you work, National Insurance for the self-employed is calculated differently to that contractors (UK) who are employees of their own limited company. As a contractor, when running your own UK company, you can choose your own level of salary and this is a contractor benefit (UK). Therefore, please read on to find out more with regard to 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 tax?
  • How do I pay tax as a contractor? 
  • Why do I pay employer’s NI as a contractor? 

In this guide, we’ll take a look at these and discover the employee’s and employer’s NI rates 2023/24. 

There are further common questions, which arise from UK business owners around how much NI do I pay. Indeed, other questions will be in respect of how NI works and when you should pay this. 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 employer’s 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, in this guide we’ll look at who pays NI, how NI works, the UK NI rates and how much NI do you pay as a UK contractor.

What is NIC?

Firstly, NIC is a form of contractor self-employment 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. When you’re in employment, there’s 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 your own 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 2023/24? 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 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, it’s important to be aware of your UK NI contributions while you’re working. This is because when you’re paying NI contributions throughout your working life, they 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 self-employed contractor taxes. In addition, if you employ anyone else, such as paying your spouse a salary, they may also pay NIC on their salary.

Contractor income tax (PAYE)

Besides employee NICs as a self-employed contractor tax, 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 (contractor 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 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 such as FreeAgent. Basically, 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 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

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

  • Limited company taxes -this explains as a contractor how much tax do I pay and how do contractors pay taxes.

The classes of National Insurance in the UK

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 2023/24 you’ll pay NIC under the following National Insurance classes:

  • 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.

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.

In the UK in 2023/24, income tax for contractors 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 

UK NIC earnings limits 2023/24 

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). 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 NI credits 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’s no upper earnings limit for employer NIC liabilities.

National Insurance rates 2023/24

When we consider how much is Class 1 National Insurance, the UK NI rates for limited company NI contributions in 2023/24 are:

  • 12% employee NI contribution for income between the primary earnings threshold and the upper earnings limit. This has now been reduced to 10% from 6 January 2024.
  • 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 (this is called the secondary threshold) for Class 1 National Insurance and Classes 1A and 1B.

As mentioned earlier, the above contractor National Insurance 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 were a mixture of the two rates i.e., the employer NIC rate was effectively 14.53%.

There are also different employee and employer NI rates for under 21’s, apprentices under 25 and freeport etc. Therefore, on the HMRC website you can find the complete list for employee and employer National Insurance rates 2023/24.

UK Contractor NI 2023/24 

In 2023/24, when considering limited company National Insurance for contractors:

  • A contractor will be liable to pay the employee’s NI contribution at 12% on income above the primary threshold.
  • The company will be paying employer’s National Insurance at 13.8% on income above the employer’s NI threshold (the secondary threshold).

The employee NI contribution 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 employee’s NI contribution rate will reduce to 2%. The employer’s NI contribution rate remains at 13.8% above this level.

What else to think about

Contractor National Insurance -for UK contractors working through their own company 

If you’re working through your own company, you have 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 level of pay is just above the contractor salary threshold for NI it still counts as a qualifying year for state pension purposes. What’s more, this level of salary will result in a small amount of limited company NI contributions to pay each year (a few hundred pounds).

Importantly, when we consider how do 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 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 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 to begin with. On 6 April 2016, HMRC increased this to £3,000. Then, 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 Employer’s NI Allowance 2023/24 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. You’ll 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’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 is 13.8% (14.53% in 2022/23 due to the mixture of rates as mentioned earlier).

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’re self-employed, you may pay income tax and pay Class 2 and Class 4 NICs depending on your earnings. With regards 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 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 per annum. Secondly, they also pay Class 4 NI at a UK NI rate of 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’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 there. What’s more, when you work this way, it gives extra credibility to clients and recruiters, particularly those in high-end industries.

Voluntary NI contributions 

In 2023/24, you can make voluntary Class 3 NI contributions of £17.45 per week. You may do this where you aren’t currently paying NI. This may be the case if you aren’t currently 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 that you’d like to do this if you’re getting towards retirement age. If you have any NI questions, you could post a question on the HMRC community forums and someone from HMRC will come back to you. 

Final thoughts

We’ve covered in this guide at how self-employed, employee’s and employer’s National Insurance 2023/24 works and what to consider. What’s more we’ve looked at the employee and employer NI rates 2023/24 and the relevant thresholds. In addition, we’ve also taken a look at voluntary contributions and when you might decide to make these.

As a final thought on National insurance for contractors, while working, you pay into the NI system throughout your working life. Indeed, when you pay the required amount of limited company NI contributions on your contractor salary each year, this’ll ensure 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, 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 National Insurance section of the HMRC website. Certainly, this gives detailed information on how the NI system functions.

Link to Contractor Advice UK group on

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

Published On: January 4th, 2024 / Categories: Company Taxes, First timer guide, Tax Guides /

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