Do contractors pay National Insurance tax?

Before we delve into whether contractors pay National Insurance (NI) to HMRC, let’s first establish what national insurance actually is, writes Christian Hickmott, managing director of contractor accountancy firm Integro Accounting.

What is National Insurance, and when was NI introduced?

National Insurance was first introduced in the early 1900s as a deduction against earnings to provide health insurance and welfare payments to the workforce. It was a cornerstone of the fledgling welfare state.

Today, in 2024-25, we associate it mostly with eligibility for the state pension.

Given its significance both culturally and historically, national insurance often sits apart from tax in the psyche of the British people, but put simply, it is essentially a direct tax – a deduction from earnings that is paid to the government.

National Insurance – tax on the employee and employer

Another thing that makes national insurance rather unique among taxes is the fact that both employees and employers pay NICs -- National Insurance contributions.

Different rates and thresholds apply for the employee and employer aspects of the tax.

But the deductions are based on the earnings level of the employee.

National Insurance rates for 2024/2025

At the time of writing, the NI rates for the current tax year are:

Employer’s NI: 13.8% for annual earnings over £9,096.12;

Employee’s NI: 8% for annual earnings between £12,576.12 and £50,268; 2% for annual earnings over £50,268.

Often, when you read headlines about the rate of national insurance being reduced, it is the rate for the Employee’s NI contribution that the reduction refers to, rather than the Employer’s.

Do contractors pay National Insurance tax?

Well, as is so often the way when it comes to taxes, the answer to the question – ‘Do Contractors Pay National Insurance Tax?’ is…‘It depends!’

There are several different ways of working as a contractor, and national insurance gets treated slightly differently for each one.

The two most common ways of working as a contractor are either as a director and owner of your own limited company; or working through an umbrella company.

If you are working through your own limited company, then your contracts will either fall “inside IR35” or “outside IR35.” And the national insurance deductions are again treated differently, depending on the IR35 status of your contract. Don’t worry, below, I cover both!

National Insurance when working through an umbrella company

Umbrella company contractors pay national insurance tax in two ways – both as the employer and the employee.

When working through an umbrella company you are effectively employed by the umbrella company, so the funds to meet the Employer’s NI contribution are deducted from your earnings.

It is therefore essential that you take Employer NI contributions into account when establishing your take-home pay from an IT or tech position to be executed through an umbrella company.

National Insurance when working through a limited company – ‘inside IR35’

Although not the most popular way of contracting, it is important to know how you’ll pay national insurance tax when working on an “inside IR35” contract, through your own limited company.

If you find yourself with an “inside IR35” contract you will broadly find that all your earnings need to be taxed as if you had been earning through an umbrella company.

As with working through an umbrella company, contractors pay national insurance tax twice over when working “inside IR35,” as they are deemed to be both the employer and employee.

National Insurance when working through a limited company – ‘outside IR35’

Normally contractors pay national insurance tax when working through a limited company.

However, if you find yourself able to work on an “outside IR35” contract, there is a high degree of flexibility. This is because when your contract is through your own limited company, you have the option to set a salary at a level of your choice. You can then top-up your income through dividends, declared from the company profits.

NICs as a contractor? It’s horses for courses, but definitely consult a contractor accountant

What you decide to do in this situation (contracting via your own limited company) will very much depend on your own individual circumstances.

That said, most contractors choose to pay themselves a low salary in line with the income tax personal allowance (£12,570). This means only paying a small amount in national insurance contributions but with the benefit of still contributing towards your years for state pension provision.

As you can hopefully see, there are several variables to consider when weighing up how much contractors pay in national insurance tax.

And finally, our very own HMRC-style mantra…

But in line with HMRC’s well-known mantra ‘Tax Doesn’t Have to be Taxing,’ we’d say, ‘NI Need Not be Overwhelming.’ If in doubt or just keen to know your NICs liability as a contractor, reach out to a specialist contractor accountancy provider -- many will offer tailored comparison before you need to commit to their services.