How much National Insurance will I pay as a contractor?

With changes to National Insurance contributions (NICs) effective since January 6th 2024, now’s the time to ask the understandably often-asked question, ‘How much National Insurance will I pay as a contractor?’ 

Generally speaking, how much NICs you pay to HMRC, depends on how you are engaged as a contractor to provide your services to your end-client, writes chartered accountant Helen Christopher. 

NICs if Limited Company Contractor Outside IR35 

As director and shareholder of your own limited company, you wear ‘two hats’ and that influences how much NI you pay.  

It is highly likely that you withdraw monies from your limited company through a combination of salary and dividends, and National Insurance impacts these strategies in different ways.

Salary NICs 

Salary payments attract Class 1 NIC, both Employer and Employee contributions. 

Earnings between £12,570 and £50,270 will, since January 6th 2024, attract Employee NICs at a rate of 10%, down from a previous 12%. 

For earnings above £50,270, the NICs rate drops to 2%. There has been no change to this rate. 

Employee NICs are deducted from your gross salary at the point of payment and paid over to HMRC through the Pay As You Earn (PAYE) scheme. 

Employer NICs are calculated on your gross salary at a rate of 13.8% where salaries are between £9,100 and £50,270 a year. Employer NIC is paid over to HMRC at the same time as your tax and Employee NICs. No changes have been announced for 2024.

Both Employee and Employer NICs are tax deductible expenses through the limited company and therefore attract tax relief for corporation tax. 

Eligible businesses can claim a reduction against their Employer Class 1 NIC bill up to a maximum of £5,000 each tax year. However, this allowance is not available where your company only has one employee if the employee is also a director of the company.  

Dividends 

Dividends are the unsung heroes of NICs! In fact, dividends don't attract any National Insurance. 

However dividends do face a different kind of foe: the dividend tax.

For basic-rate taxpayers, the tax on dividends remains at 8.75%, while higher-rate taxpayers pay 33.75% and additional-rate taxpayers face 39.35%. 

Balancing the salary-dividend equation becomes a strategic move to optimise your overall tax liability. 

Self-Employed

It is probably worth mentioning in this NICs guide for contractors, that there are also changes to the National Insurance rates for those operating through a self-employed (sole trader) model, as opposed to a limited company. 

Class 2 NIC is payable at the rate of £3.45 per week, if your profits exceed £12,570. But Class 2 is being abolished from April 6th 2024. 

Class 4 NICs are payable on your sole trader profits between £12,570 and £50,270 at a rate of 9%. But Class 4 falls to 8% from April 2024. 

NICs with Umbrella Company Employment 

Delivering your contractor services through employment with an umbrella company (most likely because you are Inside IR35), means that your umbrella employer will take care of your tax and NICs through the operation of PAYE.

As an employer, your umbrella company is legally obliged to pay Employer NIC, along with other employment costs, and as an employer, they need to be able to fund those costs. 

A compliant umbrella company will agree an ‘assignment rate’ with your agency or end-client. This rate covers both your gross pay and the umbrella company’s costs. The agreed rate will include amounts for employment costs such as Employer NIC, the Apprenticeship Levy, Auto-Enrolment costs, holiday pay, insurance, and the umbrella company’s margin. 

In practice, your umbrella company charges your agency or end-client the assignment rate for the work you have carried out. They then ensure that all statutory employment costs are paid, and they retain a margin. The balance of the income received after these costs, is your gross pay, which is processed through usual PAYE systems and tax and Employee NICs are deducted. 

The same rate of Class 1 NICs, both employee’s and employer’s apply as outlined earlier. 

Keep in mind, employment through an umbrella company means your salary is taxed at source, including NICs, with the aim of providing simplicity and transparency in your tax affairs.

NICs and Agency Payroll

If you are delivering your contractor services through a recruitment agency payroll arrangement, then a similar situation to that of umbrella employment (outlined above) arises.  

Your agency will agree an assignment rate with the end-client that covers both their employment costs and your gross pay. The agency will ensure that Employer NICs are paid from the assignment rate, along with other employment costs before deducting employee Class 1 NICs from your gross pay through PAYE. 

Getting help with NICs as a contractor 

For any further NICs queries, my recommendation is that you talk them out with a qualified, chartered and trusted tax or accountancy professional, au fait with the contractor sector.