National Insurance for limited companies explained

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National Insurance Contributions (NIC) are essentially a tax on any income that you earn over a certain level that go towards an array of benefits, including the state pension.

The system is divided into two different classes:

  1. Class 1 is payable on earnings from employment
  2. Class 2 and 4 are payable on the profits gained from self-employment

We understand that as a contractor, you won’t have the time in your hectic WorkStyle to know the rules inside out. That’s why we’ve created this handy guide that outlines everything you need to know.

Employee NIC

Employees are charged Class 1 NIC on everything they earn, while employers have to pay a secondary contribution. The below tables outline how much tax employers and employees are charged.

Employees

Earnings 2016/2017 Tax charged
Under £155 per week 0%
Between £155 and £827 per week 12%
Above £827 per week 2%

Employers

Annual earnings in 2016/2017 Tax rate charged
Below £8,112 0%
Above £8,112 13.8%

Benefits in kind

If your company provides certain benefits such as a company car, the company will need to pay Class 1A NIC if your income is more than £8,500, or if you’re a director with a material interest in the business. Any contributions are classed as a taxable benefit and Class 1A National Insurance is charged at 13.8%.

Any benefits that are not a legitimate business expense, for example a company car, will also be taxable on you as a benefit in kind, charged at your higher rate of tax.

The self-employed

If you’re registered as self-employed, you’ll be charged NIC in two ways:

  1. Flat rate contribution (Class 2)
  2. Variable amount based on the taxable profits of the business (Class 4)

Class 2 contributions are charged at £2.80 per week and are usually paid by direct debit, while Class 4 are collected along with the income tax paid on the profitability of the business.

The below table outlines how much Class 4 contributions will be charged, depending on your income:

Annual Earnings Tax rate charged
Below £8,060 0%
£8,060 to £43,000 9%
Above £43,000 2%

Voluntary contributions

These can be paid in situations where you’re not liable for other contributions, for example if your income is too low to incur tax charges, and help you maintain a full NIC record. They’re charged under Class 3 at £14.10 per week.

Potential problems

1. Earnings

Your earnings for NIC purposes will not always be the same for income tax, and include:

  • Salaries and wages
  • Bonuses, commissions and fees
  • Holiday pay
  • Certain termination payments

You may encounter problems in relation to the treatment of:

  • Expense payments
  • Benefits in kind

Although expense payments will usually be outside the scope of NIC, there are some exceptions. These include:

  • Most vouchers
  • Stocks and shares
  • Other assets that can be readily converted into cash
  • The payment of fees that are legally the responsibility of an employee

2. Directors

As a company director, you’ll need to pay Class 1 NIC. However, this can cause some specific problems – including:

  • Directors may have more than one directorship
  • Fees and bonuses are subjected to NIC when they’re voted or paid (whichever is earlier)
  • NIC can be charged on overdrawn directors’ loans, when low interest is charged by the company

IR35

You’ll only need to pay NIC on income from assignments deemed to be within IR35. Because of this, it’s important to be aware of your IR35 status so that you can effectively plan how to pay yourself.

For more information about IR35, please see our guide.

Want more help?

We hope this guide has helped explain the basics of NIC and given you some understanding about how the system works. If you need more advice, help is at hand!

At ClearSky Contractor Accounting, we understand that company directors have lots of responsibilities that could play havoc with their busy WorkStyle if left unsupported. That’s why we’re committed to being with our clients all the way throughout their careers, to help lighten the load and give them the time to get on with what they do best.

Running a company is anything but 9-5, so it’s reassuring to know that we aren’t either. Our online platform lets you manage your account any time day or night, whenever’s convenient for you. In addition, our dedicated team of accountants is on hand to assist with any query you may have, giving you the additional personal touch that contractors need.

For more information, or to join us, please call 08007 870 503 or email enquiry@clearskyaccounting.co.uk.

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