Guide to National Insurance for small business owners

National Insurance is a deduction from earnings, set up originally to fund various State benefits such as the NHS, the State pension and other welfare-related schemes.

In reality, it is just another tax. In fact, as standard income tax rates have remained constant for many years, NI rates have soared.

In this guide we look at how National Insurance works, and what your National Insurance Contributions (NICs) will be as a small business owner.

We have updated this guide for the 2023/24 tax year

Different types of National Insurance Contributions (NICs)

Class 1 NIC

Paid by employees and employers. These are calculated as a percentage of your wages, up to an upper earnings limit.

This is the most common NIC type. The primary contribution is paid by the employee, the secondary by the employer.

Class 1A or 1B NIC

A ‘special rate’ paid by your employer if you get certain benefits with your job, such as a company car.

The amount you need to pay is worked out on the value of taxable benefits you have received during the tax year. It is payable in the July after the end of the tax year.

Class 2 NIC

A compulsory rate paid by the self-employed. You are exempt if your earnings are below a certain limit.

Class 3 NIC

Voluntary Contributions. You can pay these to help fill gaps in your national insurance contribution record. HMRC may get in touch with you to suggest you top up your contributions.

Class 4 NIC

You may have to pay Class 4 contributions if you are self-employed and your profits are over a certain amount each year (see below for details).

NICs for sole traders (self-employed)

Sole traders pay income tax on their business profits (as self-employed individuals). In addition to income tax, self employed workers are liable to pay National Insurance Contributions (NICs).

• Sole traders pay Class 2 and Class 4 NIC’s and are required to pay contributions from the first day of self-employment.

• NICs are deducted from your gross earnings, assuming the figures are above the lower earnings threshold.

• Individuals who run a business via a partnership arrangement are taxed in the same way as sole traders.

• Class 2 National Insurance Contributions are £3.45 per week for the current tax year (2023/24) and are paid by anyone earning £6,725 or more through self-employment during the tax year.

• Class 4 National Insurance Contributions are paid on profits you make as a self employed person.

• Class 4 tax is 9% on profits between £12,570 and £50,270, and 2% on profits above £50,270.

You can view the full current NI rates and allowances on the GOV.UK website here.

NICs for Limited Company Directors

Unlike sole traders, for tax purposes, if you are a director of a limited company, you are an ’employee’ of the company. You are therefore liable to pay Class 1 NICs on your earnings. The limited company is also liable to pay Class 1 NICs as your ’employer’.

• Employees (Primary Class 1 Contribution) pay 12% on earnings between £12,570 and £50, 270. And 2% on earnings above £50,270 per year.

• Employers (Secondary Class 1 Contribution) pay 13.8% on earnings above £9,100 per year.

• You may be able to pay quarterly if you usually owe HMRC less than £1,500 every month. Contact HMRC’s payment enquiry helpline to request this.

• Limited Company directors and other employees may also have to pay Class 1A NIC’s for ‘benefits in kind’ such as a company car. Your accountant will declare such benefits each year on your P11D form.

For more details, you can read HMRC’s Guide to NI for Company Directors.