National Insurance for limited companies explained
National Insurance Contributions (NICs) are essentially a type of tax. For most workers they come out at the same time as their income tax with little extra thought. But in the contracting world, especially for limited company directors, it’s an area where significant tax efficiencies can be gained – or lost.
First up, not everybody has to pay NICs. It’s only payable on earnings by employed and self-employed workers above the age of 16 and below the statutory retirement age (from 2020 it will be 66 for both men and women in the UK). Depending on the level of salary you earn, you may also not be liable to pay any NICs – anything less than £166 (for 2019/20) per week means you’re exempt. And for limited company directors, NICs are only payable on the salaries they pay themselves, not their dividends. It’s one of the key ways they can end up taking home more pay than their sole trader counterparts or standard employees.
A key difference between NICs and any other tax is that payments towards it offer workers certain state benefits, recorded through their National Insurance Number, including statutory maternity pay and the opportunity to build up entitlement to Jobseekers Allowance and a State Pension. So, while NICs are a cost to your business, in many cases they are worth paying, even if you find yourself in the category where you’re exempt.
Limited company directors may find that they are subject to different NICs rates depending on their circumstances. It’s completely understandable if you don’t know the rules inside out, so to help, here are the basics of what you need to know:
NICs rates explained
In short, the NICs system is divided into three classes:
- Class 1 contributions are payable on earnings from employment
- Class 2 and 4 are payable on the profits gained from self-employment
- Class 3 contributions are voluntary payments.
As a company director of a limited company, and therefore an employee of your own business, you’ll need to pay Class 1 NICs.
The rates for the 2019 to 2020 tax year are 12% if you earn between £166 to £962 a week (£719 to £4,167 a month) and 2% over £962 a week (£4,167 a month). It’s always worth remembering that the rates you pay on NICs will not always tally up with what you pay on income tax, so it’s worth checking with your accountant to be sure. If you are working as a director of a limited company, you will only pay the contributions once your salary exceeds the £8,632 (for 2019/20) annual threshold. This is different to a standard employee, who will usually have weekly or monthly deductions on their payslips.
Benefits in kind
It doesn’t end there, though. Your category letter also directly affects the NICs rate you’re charged. If your letter changes, you may be due a refund, but you may also have to pay more. For example, if your company provides certain benefits such as a company car, you will need to pay Class 1A NICs if your income is more than £8,500, or if you’re a director with a material interest in the business. That’s because these contributions are classed as a taxable benefit. Class 1A National Insurance is charged at 13.8%. You can find out more about the different rates and categories on the government website.
If you’re in the process of setting yourself up as a contractor and considering whether to register as a sole trader or to set up as a director of your own limited company, it’s worth knowing the self-employed NICs rates, which are charged in two ways:
Class 2 if your profits are £6,365 or more a year
Class 4 if your profits are £8,632 or more a year.
Class 2 contributions are charged at £3.00 per week and are usually paid by direct debit. Class 4 contributions are 9% on profits between £8,632 and £50,000, and 2% on profits over £50,000. They are collected annually at the same time as your income tax based on the profitability of your business.
As mentioned earlier, because NICs offer you a number of benefits, it may be worth your while voluntarily paying them even if you find yourself exempt, for example, your income is below the threshold so you don’t incur tax charges. There are advantages to maintaining a full NIC record, including being able to claim a state pension.
Voluntary NICs fall under Class 3 and are charged at £15 a week.
New Employment Allowance
Since April 2014, businesses who employ workers have been able to reclaim employers’ NIC payments of up to £3,000 per year from HMRC. This applies to the Class 1 NICs they pay. However, from 6 April 2020, this will change and the Employment Allowance will only apply to smaller businesses with an employee NICs bill of less than £100,000 in the previous tax year.
The Employment Allowance cannot be claimed by limited companies where the director is the only employee paid above the £8,632 threshold.
To find out more about this subject and more, please head to the Knowledge Hub for the latest industry insights. If you want to talk to a tax specialist about your IR35 tax position, you can contact Larson Howie by calling us on 01163 800 400.