As a Limited Company contractor should you pay National Insurance?

If you’re new to contracting you’ll probably have lots of questions about how your company is run and what your tax obligations are. One of which is your National Insurance Contributions.

But should you even pay them? In this blog we explore just that.

Do you pay National Insurance Contributions (NIC) as a contractor?

NICs are payable by the majority of those who are self-employed or working. Your individual circumstances such as your earnings and personal circumstances dictate how much and type of NIC you’ll pay.

As a director or an employee, you’ll pay Class 1 NIC. The rates for the 2021/22 tax year are as follows:

If you earn more than £184 per week you’ll pay 12% of your earnings over this limit up to £967, then 2% of your earnings above £968 per week.

As an employee of your Limited Company your NICs are payable on the salary income you take. Your dividend income is not subject to NICs, therefore it’s more tax efficient for you to take a small salary, then ‘top it up’ with dividends. Based on your own personal circumstances your accountant will be able to advise you further on the amounts you can take to help reduce your overall tax amount due. For more information on dividends, take a look at our blog.

By paying NICs you’re entitled to certain benefits, such as basic and state pension, Employment and Support Allowance, Maternity and Job Seekers Allowance, plus many more. Your accountant will be able to discuss this further with you.

Your State Pension in greater detail

Your State Pension eligibility is based on the number of qualifying years that you’ve made NICs. You’ll have to have made a minimum of 10 years contributions, and by having 35 qualifying years you’ll have qualified for the maximum amount of £175.20 per week.

As a Limited Company you’re able to pay yourself a wage that’s small enough to avoid paying NICs, but could still receive a qualifying year for National Insurance purposes if:

• You earn at least £120 a week, £520 a month, or £6,240 a year as an employee
• You earn at least £125 a week, £540 a month, or £6,475 a year if you’re self-employed

Therefore, in most cases you’re able to pay yourself as a director up to this level in order to build up your National Insurance record, without having to pay any NICs.

To conclude, NICs and pensions are part of a wider tax efficient strategy that should be considered by all Limited Company contractors, and advised and managed by a specialist contractor accountant. In addition to the State Pension, many contractors also pay into private pensions which gain more tax efficiency at the same time as generating funds for your retirement.

National Insurance

Your Limited Company must also pay Employer’s National Insurance on your behalf. This is usually 13.8% on all earnings above £169 per week, £732 per month or £8,722 per year. Your company is currently able to claim the Employment Allowance, which exempts the first £4,000 of Employer’s National Insurance. Your eligibility for this allowance is dependent on your company’s structure and the industry in which it operates. Your contractor accountant will be able to advise you further on this.

How can SG Accounting help?

Ensuring you’re paying the correct amount of tax, NICs and other contributions from your company can be complicated, and it’s easy to make simple mistakes. That’s why it’s so important to have the support and guidance from a specialist contractor accountant, who’s able to guide you and ensure you’re paying what’s due and when, and keeping you on the right side of the taxman. If this sounds like the type of invaluable advice and support you need to help you be a contracting success, get in touch today.