National Insurance contributions (NICs) are payable whether you are self-employed or employed by your own company, although different rules and rates apply. National Insurance contributions can significantly increase the amount of tax you pay.
Although it can affect your entitlement to some state benefits, you will almost certainly want to minimise the total National Insurance contributions you and your business pay.
Effective tax planning may allow you to reduce your National Insurance contributions, so seek professional advice - an accountant can help you as part of your overall tax planning.
NICs for the self-employed
The self employed pay Class 4 NICs. These are calculated as a percentage of your annual profits above a basic threshold.
National Insurance contributions are calculated and collected as part of your self-assessment tax return. The total amount payable will vary according to your profits.
Prior to the 2024/25 tax year, the self employed paid both Class 2 and Class 4 NICs. Class 2 NICs have now been abolished.
NICs for employers and employees
Both employers and employees have to pay Class 1 National Insurance contributions. National Insurance contributions are collected through the PAYE system used for payroll tax deductions.
Employers pay Class 1 National Insurance contributions as a percentage of any employee's earnings above a basic threshold. Employers also pay Class 1A National Insurance contributions on any taxable employee benefits they provide.
Employees also pay Class 1 National Insurance contributions on their earnings above the threshold. The rates used to calculate employees' and employers' National Insurance contributions differ, but the total combined charge typically represents a rate of more than 20% on earnings above the threshold.
Employers can claim an Employment Allowance, which means that eligible businesses will receive a reduction on their employer's National Insurance contributions (NICs) each time they run their payroll. The allowance reduces the amount of NICs payable until the allowance has been used up. The allowance is £5,000 from April 2022.
The allowance is simple to claim using payroll software. Each time you submit an employment payment summary to HMRC simply select 'Yes' in the 'Employer Allowance Indicator' field as part of your PAYE real time reporting.
Minimising NICs
The different rates of National Insurance contributions can mean you will pay less if you are self-employed rather than an employee of your own company.
If you operate as a company, you may be able to draw money in the form of dividends. Tax and National Insurance is not payable on dividend income up to the dividend allowance threshold of £500 in 2024/25. Dividend income over the initial allowance is subject to tax (8.75% for basic rate tax payers, 33.75% for higher rate payers and 39.35% for additional rate payers). But special anti-avoidance rules mean that in some circumstances payments like this are taxable (and subject to National Insurance contributions) in the same way as employment income.
