Contractors – PAYE and National Insurance

Income tax and National Insurance contributions, or NICs, are payable on the salary that you pay yourself out of your limited company’s turnover. It is common for contractors who are not caught by IR35 to pay themselves a very low salary (e.g. minimum wage) to keep income tax and NICs to a minimum, taking the remainder of their income as dividends. Because you are automatically your company’s director, you will need to contact HMRC to set up a PAYE scheme to pay yourself.

Income tax is calculated on your gross salary, taking into account the various thresholds and allowances in force. NICs come in several flavors:

  • Class 1, or Employer’s Contributions, calculated from gross salary;
  • Class 2, which are a flat weekly rate; and
  • Class 4 which are also calculated on your gross salary.

Latest information on income tax and National Insurance rates and allowances can be found on the HMRC website. Tax and NICs due must be paid either monthly or, if the amounts are low, quarterly.

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