The Bionic guide to National Insurance Contributions (NICs) for small businesses
As a small business owner, you’ll need to pay National Insurance Contributions (NICs) for both yourself and any employees. But how much do you need to pay? And what are these contributions used for? This Bionic guide explains everything you need to know.
What is National Insurance?
National Insurance is a type of tax used to pay for certain state benefits, including the state pension, statutory sick pay, maternity leave, and some unemployment benefits. A small amount goes towards the NHS, but it’s mostly funded through general taxation, including income taxes, property taxes, capital gains, UK inheritance taxes, and Value Added Tax (VAT).
Who pays National Insurance?
You’ll need to pay National Insurance if you’re an employer, an employee, or a self-employed worker.
- If you’re an employee, your NICs will automatically be taken from your wages every week or month.
- If you’re self-employed, you’ll need to sort out your own contributions. This is usually done through your self-assessment tax return.
- If you’re an employer, you’ll also have to pay a special rate on certain employee benefits, like company vehicles.
You don’t need to pay National Insurance once you reach state pension age, which is currently 66 for people in the UK, even if you carry on working. But you do need to pay NICs for a set number of years to be entitled to draw a state pension.
What is the National Insurance increase and who's paying it?
The government has stated that an increase in NICs will be used to help with social care and NHS recovery from the Covid-19 pandemic. This means employers employees, and, the self-employed will be hit with a 1.25% increase in National Insurance from April 2022.
From April 2023 National Insurance will return to current rates and be replaced with a new health and social care tax of 1.25%. Unlike National Insurance, this will be paid by people who continue to work beyond state-pension age.
This means that for the 2022/23 and 2023/24 tax year, National insurance rates will be as below:
|2022/23 NIC rates||13.25%/3.25%||15.05%||10.25%/3.25%|
|2023/24 NIC rates||12%/2%||13.8%||9%/2%|
|2023/24 social care tax||1.25%||1.25%||1.25%|
|Charged on all annual earnings/profits above:||£9,568||£8,840||£9,568|
That's all for next year though, in the meantime, here how NICs currently work.
How much National Insurance will I need to pay as a small business owner?
The amount you pay in National Insurance Contributions depends on how you’re employed and what you earn. To help make sense of it all, contributions are broken down into the following classes:
|NI Class||Who pays?||How is it paid?|
|Class 1||Employees under state pension age earning more than £184 per week||PAYE|
|Class 1A or 1B||Employers on employee benefits or expenses||HMRC|
|Class 2||Self-employed people with annual profits of more than £6,515||Self-assessment|
|Class 3||Voluntary contributions. These are usually paid to fill gaps in contributions history||HMRC using form CF83|
|Class 4||Self-employed people with profits of more than £9,568 a year||Self-assessment|
How much National Insurance do I need to pay for my employees?
As an employer, you’ll need to make contributions on your employees’ income to the tune of 13.8% on earnings above £737.01 per month.
Employer National Insurance rates
Here is a breakdown of the rates you need to pay on behalf of your employees, as per their National Insurance category letter.
|Category letter||£120 to £170 (£520 to £737 a month)||£170.01 to £967 (737.01 to £4,189 a month)||Over £967 a week (£4,189 a month)|
You’ll also need to pay Class 1A or Class 1B contributions of 13.8% on employee benefits and expenses. Class 1A payments are also made on other lump sum payments, like redundancy.
For example, if an employee is given a £20,000 car as a benefit, you’ll pay a total of £2,760 in Class 1A NICs.
Your employees will also pay up to 12% on earnings between £797.01 and £4,189 a month, or 2% on earnings above that (one of the stranger aspects of NI is that higher earners pay less, the reason being this is offset by their higher rate of income tax).
Employee National Insurance rates
Here is a breakdown of the rates employees need to pay, as per their National Insurance category letter.
|Category letter||£120 to £184 (£520 to £797 a month)||£184.01 to £967 (£797.01 to £4,189 a month)||Over £967 a week (£4,189 a month)|
It’s also worth noting that National Insurance is paid monthly, so if you have any bonus payments you’ll pay more in those months.
How much do I need to pay in Class 3 National Insurance Contributions?
If you’re making voluntary NI payments, you can pay up to £15.40 a week.
Voluntary payments are usually made to fill gaps in your payment history that could see you refused benefits if they’re not covered.
Being a student can create a gap in your payment history, as students over 16-years-old only pay NIC on paid work. It’s unusual to make voluntary contributions in this instance though, as most will work for long enough after ending their studies to qualify for a state pension.
If you earn less than £9,568 a year as an employee, or you’re self-employed and have profits of less than £6,515, you don’t have to make NICs. But it’s worth making any voluntary contributions you can as big payment gaps could see you refused certain benefits if you ever need them (including a state pension).
How much do I need to pay in National Insurance Contributions as a sole trader?
If you’re self-employed, you’ll fall into one of two National Insurance classes:
- Class 2 - £3.05 a week on profits of more than £6,515
- Class 4 - 9% on profits between £9,569 and £50,270. 2% on profits over £50,270
NICs are taken from any gross earnings above the threshold. If your business is run as a partnership, you’ll be taxed in the same way as a sole trader.
How much National Insurance do I pay as a Limited Company Director?
If you’re the director of a limited company, you’ll pay Class 1 contributions. This means you’ll pay 12% on earnings you pay yourself (via your business's payroll) between £9,568 and £50,270. As with other higher-earningemployees, you'll pay just 2% in NI if you earn more than £50,270 a year.
Your company will also have to pay Class 1 NICs as your employer. This is 13.8% on earnings above £737.01 a month.
If you have any ‘benefits in kind’ as a Limited Company director, such as a company car, you’ll need to pay Class 1A NICs for this benefit.
There is an exemption for any trivial benefits that cost less than £50 each. Directors of companies with five or fewer shareholders can’t take more than £300 of trivial benefits in a tax year.
How much will the National insurance increase cost business owners and employees?
The bad news for business owners is that this increase will make it more expensive to employ staff, which could be a disaster for SMEs stills struggling to recover from the effects of the pandemic.
Let’s say you have one member of staff working 40 hours per week on £8.91 an hour (the current National Living Wage). As things stand, that employee will cost you £2,557.53 in NICs. But with the 1.25% increase, you’ll pay £2,789.18 a year in NICs.
That’s an extra £231.65 a year for each member of staff.
Multiply this by several employees and the costs really start to rocket.
And the changes will hit your own pay packet too. As a self-employed business owner, you’ll pay either Class 2 or Class 4 for National Insurance. The rates in both classes are less than the rates paid by SMEs and are taxed on income after business expenses.
Under the new rules, sole traders and the self-employed will lose an additional 1.25 pence for every £1 earned. Given you pay your own salary, a tax on earnings is a direct reduction of income.
Not only could 2022/23 prove to be another tough year for small business owners, but it’ll also hit employees hard too - in the example above, our minimum wage worker will pay an extra £231.66 a year in NICs.
How Bionic can help you cut business costs
If you're paying more in tax, you might need to cut costs in other areas to help make ends meet.
Speak to the tech-enabled team at Bionic to see how much you could save on business essentials, including business energy, insurance, phone and broadband. We can even help you find a better deal on business finance, whether you're looking for funding to cover cashflow, expansion, or anything in between.