National Insurance Contributions - FAQs
What are National Insurance (NI) Contributions?
National Insurance (NI) contributions are a tax on earnings and self-employed profits paid by employees, employers and the self-employed.
They can help to build your entitlement to certain benefits depending whether you are employed or self-employed, such as the State Pension and Maternity Allowance.
How do I make National Insurance (NI) Contributions as a Self-Employed Sole Trader?
Self-Employed Sole Traders pay NI contributions via an annual self-assessment tax return.
The two types of NI paid by Sole Traders are as follows;
- Class 2 NI - £3.15 per week, paid on profits of £6,725 or more a year;
- Class 4 NI - 10.25% on profits between £9,881 and £50,270, 3.25% on profits over £50,270.
If profits are below £6,725 then Sole Traders can opt to pay voluntary Class 2 NI Contributions.
How do I register for National Insurance (NI) as a Self-Employed Sole Trader?
When you register as self-employed with HMRC (www.gov.uk/register-for-self-assessment/self-employed), you will automatically be signed up to file an annual self-assessment tax return.
The self-assessment tax return will record any NI contributions and payments.
How do I make National Insurance (NI) Contributions as a Limited Company Director?
As a limited company director the company will need to be registered for PAYE and run payroll to enable you to earn NI contributions.
NI contributions are calculated between 6th April and 5th April each year. Currently, you will need to earn at least £6,396 per year as a directors salary to earn NI contributions.
Employees (including Company Directors) Class 1 NI is payable at 13.25% on earnings above £9,880 per year. The company will also pay Employers Class 1 NI of 15.05% on earnings of over £9,100 per year.
From July 2022 the earnings threshold for employees Class 1 NI will rise to from £9,880 to £12,570 per year.
Will I pay National Insurance (NI) on Dividends as a Limited Company Director and/or Shareholder?
No, NI is not payable on dividend income. Dividends are taxed at 8.75% for income between £14,570 and £52,270, this increases to 33.75% for income above £52,270.
Dividend tax is calculated by completing a directors annual self-assessment tax return.
For more information read our article on dividends here - www.matrix-accounts.com/blog-posts/limited-company-dividends-faqs
Do I pay National Insurance (NI) contributions twice if I am an employee and Limited Company Director and/or Shareholder?
If you are employed outside of your own limited company, then you may already be making NI contributions via that employment.
Your employment earnings will need to exceed £6,396 per year with deductions usually made monthly via PAYE. If you are unsure, check your latest payslip or P60.
As an employee making NI contributions there is no requirement to also become employed by your Limited Company as a director to make NI contributions. In this scenario it is usually more tax efficient to receive your income from the Limited Company exclusively as dividends.
What is a National Insurance (NI) number?
Your NI number is your unique identification number, this ensures that your NI contributions and tax are correctly calculated and recorded by HMRC.
You can apply for an NI number if you don't have one here - www.gov.uk/apply-national-insurance-number
What are Class 1a and 1b National Insurance (NI) contributions?
Class 1a and 1b NI contributions are payments made by employers on some employee benefits classified as "Benefits In Kind" (BIK).
Find out more about BIK and form P11D in our article here - www.matrix-accounts.com/blog-posts/limited-company-benefits-in-kind-p11d-faqs
What are Class 3 National Insurance (NI) contributions?
Class 3 NI contributions are voluntary payments used to fill gaps in your NI contributions record. This may help you to qualify for benefits such as the state pension.
The Class 3 NI rate is £15.85 for 2022/2023.
Any other information?
National Insurance (NI)is paid by employees and the self-employed over 16 years old and below the state pension age.
Details of your NI contributions to date can be obtained from HMRC or accessed via your personal government gateway account.