IT Contractor Tax - Accountants for Contractors

Both limited company and umbrella company contractors are liable to pay National Insurance Contributions (NICs) on any salaried income paid above a certain threshold.

Although National Insurance was originally set up to fund the NHS, NIC rates have risen rapidly over the past decade to fund general Government spending, as politicians become more weary of increasing headline income tax rates. In fact, National Insurance now contributes almost one in every five pounds received by HM Treasury.

What are Class 1 NICs?

All UK companies and their employees are liable to pay Class 1 NICs on income received above the lower rate threshold.

For the 2013/14 tax year, limited companies will pay Employers' National Insurance if you salary is £148 per week or more, at a rate of 13.8%.

Employees are liable to pay Employees' National Insurance at 12% on earnings between £149 and £797 per week, and at 2% for income above £797 per week.

How to pay National Insurance

If you are a limited company contractor, your accountant should have set up a company payroll to automatically calculate the net pay of all company employees. Importantly, NICs are not payable on dividends, which is why limited company contractors typically pay themselves a modest salary (often beneath the prevailing NI threshold), and take most of their income in the form of dividends.

Tax and NICs should be deducted at source, and paid to HMRC each month (or quarter if the amounts are low - currently under £1,500 per month). You can even pay your annual salary in one single month, but your accountant will need to let the tax authorities know via HMRC's Payment enquiry helpline.

If you have no tax / NIC payments to make at all, you should inform HMRC via this online form.

Umbrella company employees also pay Class 1 NICs - the umbrella company will deduct both Employers' and Employees' contributions from your income. You will see the deductions on your weekly or monthly payslip.

National Insurance for the 'self employed'

The 'self employed' (business owners who don't work via limited companies) are liable to pay Class 2 and Class 4 NICs on their annual earnings. The 2013/14 Class 2 NIC rate is £2.70 per week if you earn more that £5,725 per year.

The Class 4 rate is calculated at the end of each tax year, according to annual profits. For the 2013/14 tax year, the Class 4 rate of 9% is applied to annual profits between £7,755 and £41,450, and at a rate of 2% on profits over £41,450 p.a.

The vast majority of contractors do not work on a 'self employed' basis, but we have included the Class 2 and 4 rates for the sake of completeness.

Further Information

For more background information, read HMRC's guide to National Insurance.