National Insurance for contractors & limited company NI Contributions

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Introduction 

When you are a limited company contractor, how do you pay your contractor National Insurance Contributions (NIC)? 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.

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.

Therefore, how will you pay your contractor National Insurance? When you are a UK contractor or freelancer it is important to be aware of this as NIC contributions affect your future entitlement to the UK state pension when you retire.

In summary, when you have your own company, it can pay you a director’s salary, and the NI 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.

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. Important to note that these taxes (PAYE and NIC) are deducted from the gross salary to arrive at the net pay.

Contractor National Insurance -initial thoughts

When your company pays salaries, it needs to operate a PAYE scheme. Please note that 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 contractors and small business owners will appoint a specialist contractor accountant to look after this for them.

Please note that 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 increased by 1.25% after being set at the same levels for many years. As a result, the amount you can earn before paying NI is now aligned with the personal allowance (£12,570 in 22/23) from July 2022.

We have also, for ease of reference, written about:

  • The filing dates for official documents and tax payments. 

Employee and self-employed

You will pay National Insurance through your monthly or weekly salary if you are an employee.

On the other hand, if you are self-employed, you will pay NIC as follows:

  • Firstly, Class 2 NI is payable weekly at a flat rate of £3.15.
  • Secondly, Class 4 NI is payable as a percentage of your self-employed profits.

Please note that HMRC will work both out as part of the Self-Assessment tax return submission process.

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, Income tax is payable on your salary if it is more than £12,570 per annum. Please note that this is the current level of the personal allowance.

As a side note, directors pay NI when they exceed 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.

Contractor National Insurance -considerations 

NIC rates 

National Insurance applies to salaries as follows:

  • Employers are required to start reporting earnings above the National Insurance lower earnings limit (LEL). Please note, in 2022/23, the NIC lower earnings limit is set at £533 per month or £6,396 per annum. At this level, benefits will accrue for the employee’s state pension.
  • The primary threshold (PT) for employee contributions is set at £823 per month or £9,880 per annum for 2022/23.
  • The upper earnings limit is set at £4,189 per month or £50,270 per year for 2022/23.
  • The secondary threshold (applicable to employers) is set at £758 per month or £9,100 per year. Please note that there is no upper earnings limit for employer NIC liabilities.

The rates for National Insurance 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.
  • 13.8% employers NI for income over the lower earnings limit for Class 1 National Insurance and Classes 1A and 1B. 

The above NI rates were all increased by 1.25% from 2022/23, however the government later reverted on these increases.

When considering 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 £190 and £966. In addition, employees’ NI at 2% is payable on a weekly wage above £966.

These weekly limits equate with annual salary levels of £9,880 and £50270. Please note that salary earnings above £50,270 are where the rate will reduce to 2%.

Contractor National Insurance –for 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 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. Please note that the rules here are quite complex. Therefore, please see the www.gov.uk 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 to £3,000. What’s more, on 6 April 2020, it was increased to 4,000, and on 6 April 2022, it increased to £5,000.

The allowance effectively refunds the employer’s NICs to the employer, up to the value of the EA each tax year. You will need two paid employees to qualify, each earning above £9,564 per annum. 

Class 1A National Insurance 

When considering 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.

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.

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 £3.15 per week for Class 2 NI if their profits are above the small profits threshold (SPT) of £6,725 or more a year. Secondly, they also pay Class 4 NI at 10.25% through their Self-Assessment Tax Return if their profits are £9,880 (this will increase in July 2022) or more a year.

2022/23 thresholds & rates
No NI incurred between £0 to £6,724
Small profits threshold for Class 2 NICs £6,725
Lower profits limit for Class 4 NICs £9,880 (increasing July 2022)
Upper profits limit £50,270
Class 2 NICs £3.15 per week
Class 4 NICs up to the upper profits limit 10.25%
Class 4 NICs above the upper profits limit 3.25%

It is worth noting that very few IT contractors will work as self-employed. Most contractors today operate through their own company. Important to note that working this way gives extra credibility to clients and recruiters, particularly those in high-end industries. 

Final thoughts

As a final thought on NI for contractors, paying into the NI system throughout your working life is key. Please note that 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.

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 www.gov.uk site. Please note that 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: August 1st, 2022 / Categories: Company Taxes, First timer guide, Tax Guides /

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