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National Insurance guide for small business owners

If you are a limited company director, you are liable to pay both employers’ and employees’ National Insurance Contributions on any salaries you pay above the current threshold.

National Insurance NICs
Although National Insurance Contributions were originally intended to fund the costs of illness, unemployment, and health projects, in recent years successive Governments have sought to increase NICs markedly, in order to claim that the rate of income tax has remained relatively stable.

It is a tax on income in all but name, and contributes almost 20% of all HM Treasury receipts.

Significantly for limited company directors, NICs are only payable on salaries and not on dividends. So, the benefits of using dividends to draw profit from a company are significant compared to employees, who receive a salary and no dividends.

What rates of National Insurance apply to limited company employees?

You may not have to pay any NICs at all, depending on the level of salary you decide to pay yourself as a limited company director. The rates quotes here are for the 2015/16 tax year (for previous years, visit our Tax Rates section).

In fact, if you earn less than £156 per week, you are not liable to pay any NICs at all.

1. Employees’ NICs

As an employee of your limited company, you pay Class 1 National Insurance Contributions

You pay 12% of earnings between £156 and £815 per week.
You pay 2% on any earnings above £815 per week.

These contributions are deducted via your payroll each month (which your accountant sets up on your behalf).

2. Employers’ NICs

As your employer, your company is also liable to pay Class 1 Contributions on salaries paid to its employees.

The company pays 13.8% on income at or above £156 per week.

What rates of National Insurance apply to the self employed (sole traders)?

If you are a sole trader, or member or a partnership, you do not pay Class 1 Contributions on your income.

You pay Class 2 NICs monthly or six-monthly, via direct debit, assuming your income is over £5,965 per year.

The current Class 2 NIC rate is £2.80 (2015/16) per week.

If your annual business profits are above a certain threshold, you will also pay Class 4 NICs, however these are payable during the annual self assessment process.

The current Class 4 NIC rates are 9% on profits between £8,060 and £42,385, and 2% on profits above £42,385.

New Employment Allowance

Since April 2014, all eligible businesses have been able to reclaim employers’ NIC payments of up to £2,000 per year from HMRC. Find out more in our guide to the Employment Allowance here.

Further information

The HMRC National Insurance guides have moved to GOV.UK. Here are the most relevant ones for business owners:

Hiscox Business Insurance
Pay with monthly direct debits
Qdos Tax Enquiry Insurance
Cover just £99/year