National Insurance Contributions for Limited Companies

What are National Insurance Contributions?

National Insurance Contributions (NICs) are payments made by both employees and employers in the United Kingdom to fund state benefits such as the State Pension, statutory sick pay, maternity pay, and other social security benefits. For limited companies, managing NICs is a crucial part of payroll administration and tax compliance.

Different Types of National Insurance

There are several classes of National Insurance contributions, each relevant to different categories of earners:

1. Class 1: Paid by employees and employers on earnings.
2. Class 2: Flat-rate contributions paid by self-employed individuals.
3. Class 3: Voluntary contributions made by individuals to fill gaps in their NIC record.
4. Class 4: Paid by self-employed individuals based on their profits above a certain threshold.
5. Class 1A and Class 1B: Paid by employers on benefits and expenses provided to employees.

For limited companies, Class 1 NICs are the most pertinent, as they relate directly to the payroll of employees and directors. Class 1A and 1B contributions are also relevant when providing benefits and expenses.

Class 1 National Insurance Contributions: Detailed Breakdown

Class 1 NICs are split into two main components: employee contributions (primary) and employer contributions (secondary).

Employee (Primary) Contributions

Employees pay Class 1 NICs based on their earnings. The rates and thresholds for the 2023/24 tax year are as follows:

• Below the Primary Threshold (£12,570 per year): 0%
• Between the Primary Threshold and the Upper Earnings Limit (£12,570 – £50,270 per year): 12%
• Above the Upper Earnings Limit (Over £50,270 per year): 2%

These percentages are applied to the employee’s gross earnings, including salary, bonuses, and other taxable benefits.

Employer (Secondary) Contributions

Employers pay Class 1 NICs on their employees’ earnings above a certain threshold. The rates for the 2023/24 tax year are:

• Below the Secondary Threshold (£9,100 per year): 0%
• Above the Secondary Threshold: 13.8%

This rate is applied to the employee’s earnings over the secondary threshold, with no upper limit for employer contributions.

Class 1A National Insurance Contributions

Class 1A NICs are paid by employers on most taxable benefits provided to employees, such as company cars, private health insurance, and other non-cash benefits. The rate for Class 1A NICs for the 2023/24 tax year is:

• Rate: 13.8%

Class 1A NICs are calculated annually and are reported and paid separately from regular Class 1 NICs. The process typically involves:

1. Calculating the Value of Benefits: Determine the cash equivalent value of all taxable benefits provided to employees.
2. Reporting on P11D: Submit the P11D form to HMRC, detailing the benefits provided and their values.
3. Paying Class 1A NICs: Calculate the Class 1A NICs due at the rate of 13.8% on the total value of the benefits and pay this amount by 19 July following the end of the tax year (22 July if paid electronically).

Class 1B National Insurance Contributions

Class 1B NICs are paid by employers on benefits and expenses included in a PAYE Settlement Agreement (PSA). A PSA allows employers to make a single annual payment to cover all the tax and NICs due on minor, irregular, or impracticable benefits and expenses provided to employees.

• Rate: 13.8% (applied to the value of the benefits and expenses covered by the PSA)

To use a PSA:

1. Apply for a PSA: Agree with HMRC on which benefits and expenses will be included in the PSA.
2. Calculate Total Liabilities: Determine the total value of the benefits and expenses, including the tax due.
3. Pay Class 1B NICs: Calculate the Class 1B NICs due at 13.8% on the total value and make the payment by 19 October following the end of the tax year (22 October if paid electronically).

How Do I Pay NIC Through My Company?

Limited companies must manage NICs for their directors and employees through these steps:

1. Register as an Employer: Register with HM Revenue and Customs (HMRC) as an employer, even if you are the only director and employee.
2. Operate PAYE: Pay As You Earn (PAYE) is the system used to collect income tax and NICs from employees’ pay.
3. Calculate NICs: Use payroll software or HMRC’s Basic PAYE Tools to calculate the NICs due each pay period.
4. Submit Real-Time Information (RTI): Send details of earnings and NICs to HMRC on or before each payday.
5. Pay HMRC: Transfer the NICs, along with income tax deductions, to HMRC by the 22nd of each month (or the 19th if paying by cheque).

Working Out Your Director’s National Insurance Contributions

Calculating NICs for company directors can be approached in two ways:

1. Standard Annual Earnings Period:
   • Directors’ NICs are calculated on an annual basis.
   • This method considers the cumulative earnings and NICs from the start of the tax year to ensure correct contributions.
2. Alternative Method:
   • Similar to regular employees, directors can opt for NICs to be calculated on a per-pay-period basis.
   • At the end of the tax year, a final calculation ensures that the total NICs paid align with the annual thresholds and limits.

Choosing between these methods depends on the company’s cash flow preferences and financial planning strategies.

Do I Have to Pay NIC on Dividends?

Dividends are distributions of a company’s profits to its shareholders. For limited companies, directors who are also shareholders often receive part of their income as dividends. NICs are not payable on dividend payments; instead, dividends are subject to dividend tax rates, which are generally lower than income tax rates.

This tax treatment makes dividends a tax-efficient way to extract profits from a limited company, but it requires careful planning to balance dividends with salary to ensure compliance with tax and NIC obligations.

Conclusion

Understanding and managing National Insurance Contributions is crucial for limited companies to ensure compliance with UK tax laws and efficient financial management. By knowing the types of NICs, the methods for calculating contributions, and the implications for directors’ earnings and dividends, company directors can make informed decisions about payroll and profit distribution.

For more detailed guidance and the latest updates, it’s advisable to consult HMRC’s resources or seek professional advice from a tax advisor or accountant.