Navigating NI for Contractors 2025-26

You’ve probably seen a lot of news around National Insurance Contributions (NICs) in the last 12 months, following the election of the Labour government in May 2024.

The new government increased Employer NI from 13.8% to 15% from April this year, which drew criticism from business leaders and opposition politicians, but what’s the impact of the National Insurance changes for contractors?

 

Understanding the different classes of National Insurance

In the UK, National Insurance Contributions (NICs) are paid by employees, employers and the self-employed to fund state benefits such as the State Pension, maternity allowance and certain unemployment benefits.

The type and amount of NICs paid depend on employment status and income levels, and there are different classes of NIC that are payable by different groups of tax payers.

Class 1 NICs: Employees and Employers

Class 1 contributions are paid by employees who earn above the primary threshold, and they are deducted automatically through PAYE. Employers also pay Class 1 NICs on their employees’ earnings above a lower earnings limit, with different rates depending on salary levels.

 

Class 1A and 1B NICs: Employers Only

These classes apply to benefits provided to employees, such as company cars or health insurance.

Class 1A: Paid annually by employers on most taxable Benefits-in-Kind (BiK).

Class 1B: Paid on items included in a PAYE Settlement Agreement, covering tax and NICs on minor or irregular expenses and benefits.

 

Class 2 NICs: Self-Employed

Class 2 contributions are flat-rate weekly payments made by self-employed individuals once their profits exceed the small profits threshold. These contributions help build entitlement to certain benefits.

 

Class 3 NICs: Voluntary Contributions

Class 3 contributions are voluntary and can be paid by individuals to fill gaps in their National Insurance record. This is often done to secure eligibility for the full State Pension or other benefits.

 

Class 4 NICs: Self-Employed

In addition to Class 2, self-employed people with profits above a certain threshold must also pay Class 4 NICs. These are calculated as a percentage of annual profits and are paid through the self-assessment tax return.

 

Contractors operating as sole traders

If you’re registered as a sole trader, you’re required to pay Class 4 contributions if your profits exceed £12,570 per year. For the 2024/25 tax year, you’ll have to pay:

• 6% on profits between £12,750 and £50,270
• 2% on profits over £50,270

If your profits are less than £6,725 you’re not required to pay any NICs, but you can choose to pay voluntary Class 2 contributions voluntarily in order to retain certain benefits. The rate for 2024/25 is £3.45 per week.

 

Contractors operating as directors of a limited company

If you’ve registered a company with Companies House and set yourself up as a director, you have to pay both Class 1 NICs as an employee and an employer, as well as Class 1A and/or Class 1B NICs. That’s because directors are classed as employees, even if your company does not employ anyone else.

The rate of Class 1 NICs for 2024/25 is 8% on earnings between £12,750 and £50,270, and 2% on all earnings above £50,270.

For employers, the rate of Class 1 NICs for 2024/25 is 13.8%, but as mentioned above, rises to 15% for the 2025/26 tax year.

 

Confused? Get in touch

Staying on top of your obligations isn’t easy, with tax rates and available allowances changing from year-to-year. In fact, ensuring you’re paying everything required of you by law, as well as maximising what’s on offer to you as a contractor can feel like a full time job.

Let us take the burden off your hands.

 

Here at Warr & Co our dedicated team of sole trader and contractor accountants have extensive experience of making sure you’re fully compliant and as tax efficient as possible. We offer a tailored service to all of our clients depending on how you work and what you need, including advice on bookkeeping and identifying the best structure for your business, as well as VAT and PAYE filing assistance.

To find out if we could help you, why not book a free contractor accounting consultation today? Our expert team is on hand to put your mind at ease and allow you to focus on what you do best.