contractor and national insurance

Are you new to contracting or thinking about becoming a contractor? Now is a great time to do it, as there are many advantages to being self-employed in this uncertain climate.

The COVID-19 pandemic has shown how easy it is for employees to be affected by something they can’t control, as many were left without a job. As a contractor, on the other hand, you have the opportunity to work with several clients and have different sources of revenue.

However, there are several things contractors should take into account, including National Insurance contributions, as they’re different from what you pay when you’re permanently employed. But, as contractor accountants, we can help you manage this.

Do I Pay National Insurance as a Contractor?

National Insurance contributions are payable by most individuals who are working or are self-employed. The amount payable and type of National Insurance each person pays can vary depending on their earnings and individual circumstances.

If you’re a director or an employee, you pay Class 1 National Insurance and the rates for the tax year of 2020/21 are:

  • 12% – if your pay is between £183 to £962 a week (£792 to £4,167 a month)

  • 2% – if your pay is over £962 a week (or £4,167 a month)

As contractors are employees of their limited company, National Insurance will be payable on any salary income taken. Dividend income is not subject to National Insurance, so it’s usually tax efficient to take a small salary and the rest of your income as a dividend. This allows contractors to minimise their exposure to National Insurance and operate tax efficiently.

The key benefit of making some National Insurance contributions is that, by doing so, you’re able to build up an entitlement to claim state pension and benefits. This includes entitlement to the basic and additional State Pension, as well as benefits such as Employment and Support Allowance, Maternity Allowance and Job Seekers Allowance, amongst others.

National Insurance and State Pension

State Pension eligibility is based on the number of qualifying years that the employee has made National Insurance contributions. Entitlement to the New State Pension is subject to a minimum of 10 qualifying years on your National Insurance record – having 35 qualifying years will entitle the individual to the maximum amount of £175.20 per week.

An individual can request a State Pension statement to see how much they’re likely to get, as well as a National Insurance statement to check for any gaps in their National Insurance record.

When you own a limited company, you can pay yourself a small salary from your company which, in many cases, can be too small to attract any National Insurance contributions. However, in the tax year of 2020/21, you’ll 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 if you’re an employee

  • You earn, at least, £125 a week, £540 a month or £6,475 a year if your self-employed

Therefore, in most cases, it’s tax efficient for directors to pay themselves up to this level as they’ll continue to build up their National Insurance record without any actual National Insurance to pay.

In short, National Insurance and pensions are individual aspects of an overall tax efficiency strategy that needs to be considered by all contractors and freelancers operating through their own limited company. As well as the State Pension, contractors are able to pay into private pensions and gain further tax efficiency via their company while, at the same time, build up funds for their retirement.

Limited Companies and National Insurance

In addition to National Insurance payable by employees dependent on the level of earnings, your limited company is also required to pay Employers National Insurance on your behalf.

Typically, this is at a rate of 13.8% on all earnings above £169 per week, £732 per month or £8,722 per year. At present, your company can claim the Employment Allowance, which exempts the first £4,000 of Employers National Insurance.

Eligibility for this allowance is dependent on the structure of the company and the industry in which the company carries out its work.

Here at Gorilla Accounting, our accounting for contractors‘ service provides you with tailored support and guidance to all your tax-related queries. Additionally, we work alongside an Independent Financial Advisor who can advise on pensions and other aspects of personal financial planning.

When you become a client, we assist in ensuring you’re working in the most tax efficient way possible, so contact us today on 0330 024 0406.