National Insurance for contractors

Introduction

National Insurance (NIC) for contractors -when you are a limited company contractor, how do you pay this? Firstly, NIC is a form of tax in the UK, and it is a deduction against UK earned income. Secondly, in the UK, NIC is payable on both UK salaries and UK self-employed profits.

Therefore, if you are a UK contractor or freelancer, how will you pay your National Insurance? To sum up, when you have your own company, it can pay you a director salary and the NI will be payable on this. In addition, if you employee anyone else, such as your spouse for example, they may also pay NIC on their salary.

Besides employee NICs, PAYE income tax may also be deductible from a director or employee salary. Important to note, these two taxes (PAYE and NIC) are deducted from the gross salary to arrive at the net pay.

Initial thoughts

When your company pays salaries, it needs to operate a PAYE scheme. Please note, this can be done via the HM Revenue & Customs (HMRC) website. Alternatively, this can be done more easily 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, in April 2022 there was a bit of a shake up in the Spring Statement 2022. Both employees and employers National Insurance Contributions (NIC) rates were increased by 1.25% after being set at the same levels for many years. As a result, the amount that you can earn before paying NI is also due to be aligned with the personal allowance (£12,570 in 22/23) in July 2022.

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

  • The filing dates for official documents and tax payments.

Employee and self-employed

If you are an employee, you will pay National Insurance through your monthly or weekly salary.

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

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

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

Your NI payments, whether you are 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, this is the current level of personal allowance.

As a side note, directors pay NI when they go over the NI threshold. In comparison, employees pay NI month to month or week to week, depending on what they earn as pay.

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.

Considerations   

NIC rates

National Insurance applies to salaries as follows:

  • Employers are required to start deducting NICs on earnings above the lower earnings limit (LEL). Please note, in 2022/23, this 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, there is no upper earnings limit for employer NIC liabilities.

The rates for National Insurance are:

  • 25% employee NI for income between the primary threshold and the upper earnings limit.
  • 25% employees NI for income over the upper earnings limit.
  • 05% employers NI for income over the lower earnings limit for Class 1 National Insurance as well as Classes 1A, and 1B.

 When considering National insurance for contractors:

  • A contractor will be liable to pay employee’s NI at 13.25% on income above the primary threshold.
  • The employer will pay employers National Insurance at 15.05% on income above the lower earnings limit.

The employee NI of 13.25% is payable on a weekly salary between £190 and £966. In addition, employees NI at 3.25% is payable on a weekly wage above £966.

These weekly limits equate with annual salary levels of £9,880 and £50270. Please note, salary earnings above £50,270 are where the rate will reduce to 3.25%.

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 normal employee or umbrella company worker. Notably, most contractors with their own company pay a small salary just above the NI threshold. Importantly, besides the take home pay from their salary, they will then take the rest of their income as dividends (there is no NI on dividends). Please note, 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 National Insurance contributions based on this. However, this 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, the rules here though 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 originally 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 employers NICs to the employer, up to the value of the EA each tax year. To qualify, you will need two paid employees, each earning above £9,564 per annum.

Class 1A National Insurance

When considering National insurance for contractors 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 once per year. 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 amount of 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 be increasing 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 on a self-employed basis. Most contractors today, operate through their own company. Important to note, working this way gives extra credibility to clients and recruiters, in particular for those in high-end industries.

Final thoughts

As a final thought on NI for contractors, it is key to pay into the NI system throughout your working life. Please note, when you pay in the required amount for at least the correct number of years while you work, you will qualify for your full state pension when you do reach your retirement age.

Furthermore, as far as the future goes though, who knows how much this will be worth when you do actually retire. Therefore, it may therefore be wise to look to invest in a range of other areas. These could include personal pension, savings, rental properties, and other investments to build up extra income for the day when you do retire.

Finally, please see the NI section of the www.gov.uk site. Please note, 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: March 17th, 2021 / Categories: Company Taxes, First timer guide, Tax Guides /

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