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What National Insurance Contributions do contractors have to pay?
Posted Jun 12, 2011
The National Insurance system was originally set up to the fund the cost of illness and employment, and to fund the pension pot of the nation's workforce.
In recent years, both Labour and Conservative Governments have significantly increased NIC rates in order to keep the headline grabbing rates of income tax at relatively low levels.
A tax in all but name, National Insurance receipts now generate almost 20% of all Treasury income.
Are all contractors liable to pay NICs?
If you are a limited company or umbrella company employee and your salary is higher than the primary threshold for National Insurance, you are liable to pay Class 1 NICs on your income. In addition, limited companies must also pay Class 1 employers' NICs on income paid to employees.
One of the main tax benefits of working via a limited company is that you can draw down most of your company profits in the form of dividends. Dividends are free from NICs altogether. If you pay yourself a salary below £7,488 per year, no employers' or employees' NICs are payable at all.
Umbrella company contractors are 'employees' of their umbrella scheme, and pay income tax and NICs on their entire salaries following deductions for expenses and other allowances.
If you are caught by IR35, your entire 'deemed income' is subject to Class 1 NICs.
What are the National Insurance rates?
1. Employers' NICs
Employers pay Class 1 NICs on all income paid to employees.
The rate paid is 13.8% on all income of over £144 per week (£7,488 per annum).
2. Employees' NICs
Employees pay Class 1 NICs on their salaries.
On income of between £146 and £817 per week, you pay 12%.
On income over £817 per week, you pay 2%.
These deductions are made via your company payroll each month. Your accountant should set up and manage your payroll on behalf of your company.
Further reading
- Salary vs. Dividends - things to consider when deciding what level of salary to pay yourself from your limited company.
- National Insurance for Employers – the basics
- National Insurance for Employees – the basics
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