Whether you’re employed by someone else, you’re self-employed and run your own small business, one thing that everyone has in common is that we all must meet our tax obligations and make National Insurance contributions.
In effect, National Insurance is a form of tax. For employees, National Insurance Contributions are deducted from salary each month. But for individuals trading through a limited company, it’s a more complex area, but one with potential to gain significant tax-efficiencies.
Operating a limited company in the UK comes with various responsibilities. One crucial aspect is understanding and managing your National Insurance obligations. Navigating National Insurance is vital to running your business, so we have pulled together the information you need when operating as a limited company.
Understanding National Insurance
National Insurance is a system of contributions that individuals and employers make to fund various state benefits and services including the NHS, state pension, maternity pay, unemployment benefits, teachers, police, the fire service and much more.
As a limited company owner, you may have National Insurance obligations as an employee and (if applicable) as an employer. This means it’s crucial to understand the different types of National Insurance contributions.
Several factors can determine the level and type of National Insurance Contribution that is payable, including:
- Employment Status
- Age
- Level of Earnings
- Residence Status
National Insurance as an Employer
If your limited company has employees that earn above a certain amount, you are responsible for paying Employers National Insurance contributions on top of your employees’ salaries.
The amount you need to contribute depends on the employee’s earnings and the relevant National Insurance category. These contributions are separate from the income tax you deduct from your employees’ salaries.
As an employer you may also benefit from the Employment Allowance which allows eligible employers to reduce their annual National Insurance liability by up to £5,000. However, this cannot be claimed if there is only one employee paid above the Class 1 National Insurance threshold and that employee is also a director. Additionally, it cannot be claimed against employees whose earnings are within the scope of IR35.
National Insurance as an Employee
As a director and an employee of your limited company, you are subject to specific rules regarding National Insurance contributions and National Insurance is payable on the salary income you take. The contributions you make depend on your earnings and the specific National Insurance category you fall into. Understanding the rules for directors’ National Insurance contributions is essential to ensure compliance and avoid any HMRC penalties or issues with your personal entitlement to benefits. For example, you need to accrue 35 qualifying years of payments to receive the full state pension.
Given the complexities involved in National Insurance contributions, seeking professional advice from an accountant or tax advisor is highly recommended. They can provide tailored guidance based on your specific circumstances, help optimise your tax planning and ensure compliance with the latest regulations.
Which National Insurance category are you in?
This all depends on your earnings and the National Insurance system has different categories with different thresholds, rates, and eligibility criteria.
- Class 1 is paid by employees and employers
- Class 2 is paid if you’re self-employed
- Class 3 is a voluntary contribution
- Class 4 is paid if you’re self-employed and have profits over a certain amount
Class 1 National Insurance Rates
If you’re an employee, you start paying National Insurance when you earn more than £1,048 per month for the current 2023/24 tax year. The rate you pay depends on how much you earn.
It is made up of:
- 12% of your monthly earnings above £1,048 and up to £4,189.
- 2% of your monthly earnings above £4,189.
If you are a director, then National Insurance is calculated on an annual basis rather than a monthly basis which means you would only start paying National Insurance on total earnings above the annual threshold. The annual threshold for directors would be pro-rated depending on the directorship start date, however, for directors who were appointed at the start of the tax year (6th April 2023) or earlier this would be calculated as follows:
- 12% of your annual earnings above £12,570 and up to £50,270
- 2% of your annual earnings above £50,270.
Class 2 National Insurance Rates
If you’re self-employed, you might be able to pay Class 2 contributions instead. Class 2 National Insurance contributions are set at a flat-rate weekly contributions of £3.45 a week in 2023-24.
You will pay them for every week or partial week of self-employment in a tax year. This is if your profits for the entire tax year are £6,725 (the Small Profits Threshold) or more in 2022-23 (£6,725 in 2023-24).
Paying Class 2 contributions is voluntary for self-employed people with profits below the Small Profits Threshold.
But why would you pay this if it is voluntary?
Paying Class 2 National Insurance contributions, even if your profits are lower, can help you build contributory entitlements to benefits. This is a specialist area that an accountant can help you with.
Class 3 National Insurance Rates
Class 3 voluntary National Insurance contributions are designed to fill in any gaps in your National Insurance record. The aim is to get you a higher State Pension.
- You need to have at least 35 qualifying years of National Insurance contributions to receive a full state pension
- It’s payable to people who have reached their State Pension age on or after 6 April 2016
- Anyone with less than 35 years qualifying contributions will receive a reduced State Pension
- To receive the new State Pension you need to have a minimum of ten qualifying years
If you don’t have enough qualifying years, you might want to pay Class 3 voluntary contributions to boost your pension entitlement. For 2023-24, Class 3 NI contributions are payable at a weekly rate of £17.45.
Class 4 National Insurance Rates
If you’re self-employed and make profits of £11,908 or more in 2022-23 (£12,570 in 2023-24), you’ll pay Class 4 National Insurance contributions. If you’re over this threshold, you’ll pay 9% on profits between £11,908 and £50,270 in 2022-23 (£12,570 and £50,270 in 2023-24).
Calculating your National Insurance contributions can be complex, which is why using a trusted accountant can be the best option. Calculating income thresholds, exemptions and rates can be difficult, and it’s so important to get it right. To ensure accurate calculations, we can help.
To pay Class 4 National Insurance contributions to HMRC, you must register as an employer, maintain accurate records and submit regular reports such as payroll information and annual tax returns.
With Gorilla, your dedicated accountant will help you stay on top of things by using FreeAgent to stay organised and streamline the process. FreeAgent is a cloud-based accounting platform that’s free to all Gorilla Accounting clients. You can use FreeAgent to run your business finances from anywhere, at any time.
FreeAgent’s automation makes previously laborious and repetitive accounting and admin tasks, such as calculating and preparing your tax returns as well as submitting your returns directly to HMRC, a breeze. It will also use the information from your self-assessment tax return to calculate the national Insurance contributions that you must pay HMRC. This will all save you a significant amount of time which can be spent on core activities.
Deadline to plug the State Pension gap extended until April 2025
There’s good news if you want to make voluntary contributions to fill gaps in your National Insurance record as the deadline to do so has been extended. This means there’s more time to top up your contributions so you can receive the maximum state pension when you retire.
If you have gaps dating back to 2006, it currently costs around £800 to top-up a missing year. At current rates, this would add more than £300 each year, before tax, to your state pension. That means it will take three years to break even or £6,000 over the course of a typical 20 year retirement.
For example, if you were to spend £4,000 filling in 5 missing years from your self-employed career, this could generate £30,000 in state pension which you wouldn’t have received without filling in those gaps. With inflation, this could rise even higher.
A recent survey by Royal London established that only half of the 4,000 people surveyed knew that they needed 35 years of National Insurance contributions to get the full amount of the new state pension. More women than men were unaware and almost a third of respondents aged over 50 were surprised to learn this.
71% of respondents had never checked their National Insurance record to see if they were on track or had any gaps. If you’re not sure, you can check your State Pension position for free using the free Check State Pension service on the Government website.
Optimising Limited Company Tax-Efficiency
If you’re a director and shareholder of a limited company and operating outside of IR35 there are various opportunities to improve your tax-efficiency including splitting your remuneration between a combination of salary and dividends.
If you pay yourself a salary between £6,396 and £12,570 you can avoid paying class 1 National Insurance contributions on that part of your income as well as income tax, assuming you have a standard tax code. You can then supplement your income with dividends which are taken from company profit after Corporation Tax has been paid. The first £1,000 of dividends are tax-free and tax rates on dividends above that amount are more favourable than income tax rates.
You can also make contributions into a personal pension. Because pension contributions aren’t subject to National Insurance, this is an effective way of lowering your taxable income and reducing your National Insurance liability.
If you have any queries regarding your National Insurance contributions or about optimising your tax-efficiency, you can speak to an accountant on 0330 024 0406 or request a call back here.
