Both limited company and umbrella company employees are must pay National Insurance Contributions (NICs) on 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 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 2020/21 tax year, limited companies will pay Employers’ National Insurance on salaries of £169 per week or more, at a rate of 13.8%, or £8,788 per year.
Employees pay Employees’ National Insurance at a rate of 12% on earnings between £183 and £962 per week, and at 2% for income above £962 per week, i.e. between £9,500 and £50,000 per year.
Dividends are free from NICs altogether. If you pay yourself a salary on or below £8,788 in the 2020/21 tax year, no employers’ or employees’ NICs are payable at all (but you still qualify towards the state pension).
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 2020/21 Class 2 NIC rate is £3.05 per week if you earn more than £6,475 per year.
The Class 4 rate is calculated at the end of each tax year, according to annual profits. For the 2020/21 tax year, the Class 4 rate of 9% is applied to annual profits between £9,500 and £50,000, and at a rate of 2% on earnings above £50,000 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.
A new ‘Employment Allowance’ (EA) was introduced in April 2014, which now refunds up to £3,000 of employers’ NICs paid by any UK business, but you will need to earn over the £8,632 threshold in order to use this 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.
Read our full guide to the Employment Allowance for further details.
For more background information, read HMRC’s guide to National Insurance.