Both limited company and umbrella company employees must pay National Insurance Contributions (NICs) on salaries 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 warier 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 2023/24 tax year, limited companies pay Employers’ National Insurance on salaries of £175 per week or more, at 13.8%, or £9,100 per year.
Employees pay Employees’ National Insurance on income above the primary threshold of £12,570 per year.
12% on wages between £12,570 and £50,270 per annum. The rate was cut to 10% from 6th January 2024.
2% on wages above £50,270 per annum.
You must earn above the LEL (Lower Earnings Limit) for your salary to qualify for your state pension. In 2023/24, the LEL remains at £6,396.
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 2023/24 Class 2 NIC rate is £3.45 per week if you earn more than £12,570 per year.
The Class 4 rate is calculated at the end of each tax year – via self assessment – according to annual profits, as follows:
9% on profits between £12,570 and £50,270 per year. This will be cut to 8% fro 6th April 2024.
2% on profits above £50,270 per year.
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.
Employment Allowance
A new ‘Employment Allowance’ (EA) was introduced in April 2014, which now cancels out the first £5,000 of employers’ NICs paid by any UK business, but you will need to pay your employees over the £9,100 threshold to qualify for the Allowance.
From April 2016, the eligibility rules were tightened to prevent companies where there is a sole director with no other employees from claiming the EA.
