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National Insurance (NIC) guide for IT contractors

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 2022/23 tax year, limited companies pay Employers’ National Insurance on salaries of £175 per week or more, at a rate of 15.05%, or £9,100 per year.

Employees pay Employees’ National Insurance at two different rates during the 2022/23 tax year:

  • Between 6th April and 5th July: 13.25% on earnings between £190 and £967 per week, and at 2% for income above £967 per week, i.e. between £9,880 and £50,270 per year.
  • From 6th July: 13.25% on earnings between £242 and £967 per week, and at 2% for income above £967 per week, i.e. between £12,570 and £50,270 per year.
  • When you average out these two rates, it means that no employees’ NICs are payable above £11,908 during the tax year.

Dividends are free from NICs altogether. If you pay yourself a salary on or below £9,100 in the 2021/22 tax year, no employers’ or employees’ NICs are payable at all (but you still qualify towards the state pension).

You must earn above the LEL (Lower Earnings Limit) for your salary to qualify for your state pension. In 2022/23, the LEL is £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 2022/23 Class 2 NIC rate is £3.15 per week if you earn more than £6,725 per year.

The Class 4 rate is calculated at the end of each tax year – via the self assessment process – according to annual profits.

For the 2022/23 tax year, the Class 4 rate changes during the tax year:

  • From 6th April to 5th July, the Class 4 rate of 10.25% is applied to annual profits between £9,880 and £50,270, and at a rate of 3.25% on earnings above £50,270 per year.
  • From 6th July, the Class 4 rate of 10.25% is applied to annual profits between £12,570 and £50,270, and at a rate of 3.25% on earnings above £50,270 per year.
  • When you average out these two rates, it means that no Class 4 NICs are payable above £11,908 during the tax 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.

Read our full guide to the Employment Allowance for further details.

Further Information

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

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Last updated: 1st June 2022