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IT Contractor National Insurance (NI) Guide  

National Insurance is a deduction from earnings, set up originally to fund various State benefits such as the NHS, the State pension and other welfare-related schemes. In reality, it is just another tax. In fact, as standard income tax rates have remained constant for many years, NI rates have soared. In this article we look at how NI works, and what your liabilities will be as an IT Contractor.

Overview of National Insurance Types

Class 1 - Paid by employees and employers. These are calculated as a percentage of your wages, up to an upper earnings limit. This is the most common NIC type. The primary contribution is paid by the employee, the secondary by the employer. Most IT Contractors, as limited company directors, will pay Class 1 contributions.

Class 1A - A 'special rate' paid by your employer if you get certain benefits with your job, such as a company car.

Class 2 - A compulsory rate paid by the self-employed. You are exempt if your earnings are below a certain limit.

Class 3 - Voluntary Contributions. You can pay these to help fill gaps in your national insurance contribution record. HMRC may get in touch with you to suggest to top up your contributions.

Class 4 - You may have to pay Class 4 contributions if you are self-employed and your profits are over a certain amount each year.


Limited Company Directors

Unlike sole traders, for tax purposes, if you are a director of a limited company, you are an 'office holder' of the company. You are therefore liable to pay Class 1 NIC's on your earnings. The limited company is also liable to pay Class 1 NIC's as your 'employer'.

Employees (Primary Class 1 Contribution) pay 11% on earnings between £94 and £630 per week, and 1% above £630 per week [2005/6].

Employers (Secondary Class 1 Contribution) pay 12.8% on earnings above £94 per week [2005/6].

These NIC deductions should be paid to HMRC by the 19th of each month, unless payments are low, where you may be able to pay quarterly.

Limited Company directors and other employees may also have to pay Class 1A NIC's for 'benefits in kind' such as company car provision. Your accountant will declare such benefits each year on your P11D form.

All Current NI rates can be found on the Inland Revenue site here.


Published on Mar 14, 2006


Further Reading