Starting your contracting journey in the UK is exciting, but understanding contractor National Insurance is one of the first hurdles for limited company contractors. This guide explains how NI works, who needs to pay it, and how it affects your salary, dividends, and overall taxes.
Whether you’re managing your finances yourself or working with a specialist accountant, knowing the rules helps you stay compliant and plan efficiently. Read on to discover everything you need to know about National Insurance for contractors and how it can impact your take-home pay and future state pension.
Table of Contents:
- Should I Pay National Insurance as a Limited Company Contractor?
- National Insurance Class 1 Explained
- How to Pay National Insurance as a Contractor
- National Insurance & The State Pension
- Limited Companies and Employer vs Employee NI
- Why Choose Nexus Accounting?
Do Limited Company Contractors Pay National Insurance?
If you operate through a limited company in the UK, the answer isn’t as simple as “yes” or “no.” As a contractor, you generally pay National Insurance on the salary you take through PAYE, while dividends are exempt. This means you can structure your income to be tax-efficient, but it’s important to get it right from the start.
Contractors working inside IR35 are treated like employees for tax purposes, so NI is automatically deducted by the client or agency. Understanding how these rules apply to your situation helps you plan your salary, dividends, and overall tax strategy confidently, without surprises at the end of the year.
National Insurance Class 1 Explained
For limited company contractors, the most relevant type of National Insurance is Class 1, which applies to salaries paid through PAYE. Class 1 contributions are split into two parts: employee contributions, deducted from your salary, and employer contributions, which your limited company pays on top of your wages.
Employee NI is payable once your salary exceeds the primary threshold, while employer NI applies above the secondary threshold. Understanding National Insurance thresholds and how Class 1 works is essential for planning a tax-efficient salary, making decisions about dividends, and ensuring you maintain state pension eligibility.
Employee vs Employer NI
Class 1 National Insurance is split between employee contributions, deducted from your salary through PAYE, and employer contributions, which your limited company pays on top of your wages. Employees start paying NI once their salary exceeds the primary threshold, while employers contribute on salaries above the secondary threshold.
Understanding the difference helps limited company contractors plan salaries efficiently, reduce unnecessary NI, and ensure eligibility for the state pension.
| Threshold | Who Pays | 2025/2026 Annual Threshold | Rate | Purpose |
|---|---|---|---|---|
| Primary Threshold (PT) | Employee | £12,570 | 8% (on earnings between PT and UEL)
2% (on earnings above Upper Earnings Limit) |
NI is deducted from the contractor’s salary once earnings exceed this amount. |
| Secondary Threshold (ST) | Employer (company) | £5,000 | 15% (on all earnings above ST) | NI the limited company pays on salaries above this level. |
How to Pay National Insurance as a Contractor
Paying National Insurance as a limited company contractor in the UK is straightforward once you understand the process, but it’s important to stay organised to remain compliant and avoid penalties. Most contractors pay NI through PAYE on their salary, while dividends remain NI-free.
Here’s how it works in practice:
- Set up PAYE for your company – As a director, your company must be registered for PAYE with HMRC to report salaries and NI contributions.
- Calculate contributions correctly – Employee NI is deducted from your salary above the primary threshold, while employer NI is paid by the company on salaries above the secondary threshold.
- Submit regular filings – Most companies report NI monthly or quarterly using HMRC’s RTI (Real Time Information) system.
- Pay HMRC on time – Ensure both employee and employer NI are paid by the deadlines to avoid interest or penalties.
- Use accounting software or an accountant – Specialist contractor accountants or payroll software can automate calculations, reducing the risk of mistakes.
National Insurance & The State Pension
National Insurance is not just another tax. It also plays a key role in your future state pension. For limited company contractors, the contributions you make on your salary help build pension credits, which determine how much state pension you will receive in the future.
Here is what contractors need to know:
- Salary contributions count: In order to build a credit towards the state pension, you must earn above the Lower earning Limit (LEL) in that year.
- Dividends do not: Money taken as dividends does not contribute to your pension, so relying solely on dividends will not help your entitlement.
- Keep an eye on minimum contributions: Falling below thresholds could reduce your state pension, so plan your salary carefully.
- Check your NI record: Your HMRC personal account shows your contributions and projected pension, helping you stay on track.
Limited Companies and Employer vs Employee NI
Understanding National Insurance as a limited company contractor is not just about knowing the numbers. It is about how those contributions affect your company and your take-home pay.
Managing Company Costs
Employer NI is an extra cost your company has to budget for, so it is worth thinking carefully about how much salary to take. Many contractors choose a salary near the primary threshold and take the rest as dividends. This approach keeps costs manageable while staying fully compliant.
Balancing Salary and Dividends
Finding the right mix of salary and dividends is key. A higher salary increases both employee and employer NI, while a lower salary may reduce your state pension credits. Striking the right balance helps you keep more of what you earn without compromising future benefits.
Planning Around IR35
If a contract falls inside IR35, things change. Income is treated as employment income, and both employee and employer NI are deducted via PAYE. This reduces flexibility, so it is important to factor IR35 status into your overall financial planning.
Why Choose Nexus Accounting?
Navigating taxes, National Insurance, and limited company finances can be complex for contractors. Nexus Accounting specialises in supporting limited company contractors across the UK, offering expert guidance, personalised support, and clear, practical advice to help you stay compliant and make the most of your income.
Reasons to choose Nexus Accounting:
- Dedicated accountant: You get a single point of contact who knows your business and your goals.
- Contractor-focused expertise: Specialised knowledge of salary vs dividends, IR35, and NI planning.
- Transparent pricing: Fixed-fee packages with no hidden costs.
- Cloud-based tools: Easy access to your accounts using FreeAgent, wherever you are.
- Responsive support: Emails and calls answered within 24 hours, with evening and weekend appointments available.
- Strategic planning: Guidance on salary/dividend mix, pension credits, and long-term tax efficiency, not just compliance.
Key Takeaways for Contractor National Insurance
- Limited company contractors pay National Insurance on salary, not dividends, making salary planning key for tax efficiency.
- Class 1 NI includes both employee and employer contributions, with thresholds affecting how much you pay.
- Employer contributions are an additional company cost, so balancing salary and dividends can help manage cash flow.
- Paying NI affects your state pension, so keeping contributions above thresholds is important for long-term benefits.
- IR35 status impacts NI: Inside IR35, both employee and employer NI are deducted via PAYE, reducing flexibility in income planning.
- Using a specialist contractor accountant like Nexus Accounting can help optimise salary, dividends, NI, and overall tax strategy while ensuring compliance.
- Staying organised with PAYE submissions and filings helps avoid penalties and ensures smooth HMRC compliance.
FAQs
Do contractors have to pay National Insurance?
Yes, contractors do pay National Insurance, but how much depends on how you take your income. If you operate through a limited company, you pay NI on salaries taken via PAYE, while dividends are exempt. Contractors inside IR35 are treated as employees, meaning both employee and employer NI are automatically deducted. Even if earnings fall between the lower earnings limit and the primary threshold, you may still build NI credits that count toward your state pension.
Do I pay National Insurance as a limited company?
Yes, as a limited company director, you pay NI on the salary you draw from the company. Your company also pays employer contributions on top of your salary. Dividends are not subject to NI, which allows many contractors to structure their income efficiently. Special categories, such as under-21s, apprentices, or veterans, may have different rules for employer NI.
How much NI do I pay as a limited company contractor?
The amount of NI depends on your salary and the tax year thresholds. For 2025/26, employee contributions start at £12,570 per year, while employer contributions start at £5,000, with rates of 8% (employee up to the Upper Earnings Limit) and 15% (employer). If your contract is inside IR35, NI is calculated differently via PAYE. Actual NI will vary depending on your income, company structure, and eligibility for reliefs like the Employment Allowance.
Is it better to be a contractor or employee in the UK?
It depends on your goals and personal circumstances. Contractors often have flexibility and can structure income via salary and dividends to reduce NI, while employees enjoy guaranteed pay, employer benefits, and simpler tax compliance. Limited company contractors should consider NI, IR35 status, pension contributions, and other long-term benefits when comparing options.
Are small businesses exempt from the NI rise?
No, small businesses are not exempt from the 2025/26 employer NI rise. The secondary threshold has been lowered to £5,000 and the rate increased to 15% for all limited companies. However, eligible businesses may use the Employment Allowance of £10,500 to offset some of the increased employer NI costs.
Stay NI Compliant for Contractors with Nexus Accounting
Understanding National Insurance as a limited company contractor can feel complicated, but it doesn’t have to be. From planning your salary and dividends to managing employee and employer NI and staying compliant with IR35, the right guidance makes all the difference.
At Nexus Accounting, we specialise in supporting limited company contractors across the UK. We help you navigate NI, taxes, and compliance, so you can focus on growing your contracting career with confidence.
If you want expert support to make the most of your limited company and take the stress out of managing your finances, get in touch with Nexus Accounting today. We’ll guide you every step of the way.
