National Insurance is a form of tax payable to the UK government that is used to pay for certain benefits that you will receive such as the free services of the National Health Service (NHS), the government pension you will receive when you reach retirement age as well as other forms of benefits that are given to UK citizens.
Whilst the rate of income tax has always been a talking point and as such have remained around the same level, the National Insurance contributions have gradually increased.
National Insurance Payment
Thee are four different classes of National Insurance payments, although one of these four has an additional sub-class. The first of these, Class 1, is paid by individuals who employ others and those who are employed. They work on a percentage basis but there is a limit to how much this will be. As this covers most individuals this is the most common form of National Insurance contribution. The sub-class, Class 1A, is the class that is given to employers who have provided the employee with certain benefits such as private medical insurance or a company car.
National Insurance Classes
If you are a contractor who is operating through a limited company or through an umbrella company as many do, you will probably be required to pay Class 1 National Insurance contributions.
However, if they are operating as a self-employed contractor they will fall under the Class 2 contributions category where they are required to pay a compulsory amount. However, you may not be required to pay anything if your earnings fall below a certain boundary – similar to income tax.
Class 3 is the “voluntary contributions” which is a strange way of putting it – why volunteer to pay National Insurance if you don’t have to? In reality, this actually refers to those individuals who have fallen short of the required contributions and need to “top it up”. Class 4 once again is relevant to contractors because it relates to individuals who are classed as “self-employed” but who’s profits are higher than a certain amount.
All of the classes have the potential to be relevant to contractors so it’s important that you take into consideration the terms of each class in comparison to your circumstances. If you are still confused, feel free to ask your accountant, a tax agent or even just call your local HMRC office – all of whom will be able to explain to you what your position is and your requirements.