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National Insurance is often misunderstood even by longstanding UK taxpayers. Whilst you may intuitively grasp your income tax (e.g. 20% at the basic rate or 40% at the higher rate), National Insurance is complicated by the different “classes” that various people pay. Moreover, both you and your employer have separate National Insurance obligations. The tax system has also gone through multiple changes since 2022, with successive UK chancellors making adjustments. In this guide, we offer an updated guide about National Insurance to help you navigate it with more confidence and efficiency. We hope this content is useful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
What is National Insurance?
National Insurance is a separate tax from income tax. Whilst the latter is a more “general” form of taxation (e.g. to support Uk government spending), National Insurance has historically been targeted towards infrastructure and welfare – e.g. Jobseeker’s Allowance, Statutory Sick Pay and the State Pension. For most people, National Insurance contributions are automatically taken from your payslip each month under the PAYE system. Workers must pay NI contributions from age 16 until they start claiming their State Pension.
Recent changes to National Insurance
Under Prime Minister Boris Johnson’s government in 2021, plans were put in place to introduce a 1.25% rise in National Insurance (the Health and Social Care Levy). This came into force in April 2022 and was intended to help fund the NHS and also a new “cap” on an individual’s total care costs, at £86,000. The latter was supposed to come into effect in October 2023, but has now been delayed for 2 years by Chancellor Jeremy Hunt.
Returning to events in 2022, the summer produced a new Conservative government under Liz Truss. Her Chancellor, Kwasi Kwarteng, promised in his “Mini Budget” that the 1.25% National Insurance rise would be scrapped from 6 November 2023. This short-lived government was soon replaced by one led by Rishi Sunak. His Chancellor, Jeremy Hunt, decided to keep Kwasi Kwarteng’s decision to scrap the 1.25% rise in National Insurance.
Where does this leave everything? In March 2023, employees paying “Class 1” NI contributions pay 12% on income between £242 to £967 a week (£1,048 to £4,189 a month). Anything above that is then taxed at 2%. Self-employed people, by contrast, might pay Class 2 and Class 4 National Insurance depending on their profits. For profits falling between £11,909 and £50,270 the NI rate is 9.73%; for profits above this, the rate is then 2.73%. Class 2 contributions stand at £3.15 a week. In any case, these NI classes must be paid via Self Assessment.
How do I limit my National Insurance bill?
First of all, check whether you are still paying National Insurance if you have reached your State Pension age. If so, then you do not need to pay into the system anymore – unless you are self-employed and pay Class 4 contributions. Certain individuals may still want to make National Insurance contributions at this point in their lives (e.g. those deferring their State Pension). Yet if you do not fall into a “special case” like this, consider stopping to save on needless tax.
What about those who are still working? Here, you should seek financial advice to explore your options. If you are a company director, then one idea could be to reduce your salary and raise your dividend. Historically, dividends have been taxed as “unearned income” and have their own tax rate (e.g. 33.75% for those on the higher rate). Since this option reduces your earnings that are subject to income tax, it could – in some cases – save someone from needing to pay the 2% Class 1 rate on earnings over £4,189 per month. However, there are risks to lowering a salary whilst raising your dividend. One risk is that your business may not be able to pay a dividend (or one as high as you would want) if profits become squeezed. Another risk is that you may limit your ability to apply for a mortgage if your earnings are lower.
What about people who are not company directors? One option to explore is “salary sacrifice” (assuming your employer offers such a scheme). This involves sacrificing some of your salary – lowering your NI liability – equal to an increase in pension contribution. The result can be a tax saving for everyone. The employee pays less income tax and National Insurance. Employers, moreover, could save £1,000s on National Insurance. For instance, suppose a company offers to pay 5% more to employees engaging in salary sacrifice. Assuming a £25,000 average salary per employee and 50 members in the scheme, the NI saving for the employer could stand at £7,058.45 per year.
However, be mindful of the risks before engaging in salary sacrifice with your employer. If you enjoy a “death in services” benefits package, for instance, then the value of a potential payout (to your loved ones) if you die would likely be reduced since the lump sum is typically based on a multiple of your salary. You may also not be able to borrow as much for a mortgage.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk