National Insurance Planning.
For employers, employees and the self-employed.
Our state pension, benefits, health service and more are all funded by National Insurance contributions (NICs).
Recently, the differences in the way NICs are paid by those groups has created some controversy, and could lead to future changes to the National Insurance (NI) system.
A recent report by the Institute for Fiscal Studies (IFS) argued that the tax system, and especially the different NICs rates, tends to favour self-employment while discouraging employment.
Historically, self-employed people have paid lower NICs because they were eligible for fewer state benefits, but the IFS said this is no longer the case and there is now “no reason” for this disparity to exist.
How does National Insurance work?
The type of NI you pay will depend on your employment status, and whether you want to make any voluntary contributions.
Class 1 NICs are paid by employees who earn more than £183 a week in 2020/21. This is due to increase slightly to £184 a week in 2021/22. You stop paying these when you reach your state pension age.
Class 1A or 1B NICs are paid by employers on expenses or benefits they give to their employees at a rate of 13.8%.
Class 2 NICs are paid by self-employed people with profits above the small profits threshold, which is £6,475 a year in 2020/21, and will rise to £6,515 in 2021/22. They can also be made voluntarily below this level. You stop paying these when you reach state pension age.
Class 3 NICs are voluntary contributions, which you can pay to fill gaps in your NI record so you have access to certain state benefits.
Finally, class 4 NICs are paid by self-employed people with profits of £9,501 or more a year. You stop paying these from 6 April after you reach state pension age.
If you are self-employed, you’ll need to pay class 2 and 4 NICs on your business’s profits.
Class 2 NICs are paid at a fixed rate, which currently stands at £3.05 a week. For class 4 NICs you’ll need to pay 9% on profits between £9,501 and £50,000, and 2% on profits over £50,000.
Most people pay this as part of their self-assessment tax bill, due on 31 January after the end of the tax year.
Limited company directors
Directors who are employed by their limited company are liable for class 1 NICs on their salary. Separately, the company will pay employer’s class 1 NICs, which we’ll cover in more detail later. Both are collected through the PAYE scheme.
You do, however, have more options than an employee when it comes to the way in which you take your income.
Unlike a salary, dividends do not attract any NICs. It’s for this reason that many directors choose to pay themselves a small salary and extract the rest of any profits as dividends.
Working multiple jobs
Unlike income tax, which gives you a single tax-free personal allowance per tax year, NI has a new limit for every job you have with a different employer.
If you have more than one job where class 1 NICs are applicable, you may be able to defer paying class 1 NICs by contacting HMRC directly.
You should make an application as soon as possible before the start of the tax year on 6 April, but HMRC will accept applications up to 14 February following the end of the tax year.
If you are both employed and self-employed, you will need to pay both class 1 NICs on your employment income, and class 2 and class 4 NICs on your self-employed income.
There is, however, an HMRC annual maximum for NICs you are required to pay which applies to anyone who has more than one job or who is both employed and self-employed.
National Insurance credits & voluntary contributions
NI credits are available for various circumstances including unemployment, illness, maternity or paternity and more, so if there’s a period of time when you’re not paying NICs, it’s well worth checking to see if you need to make a claim.
Speak to us about national insurance.