This content is for inspiration and information purposes only. It should not be taken as investment or financial advice. To receive regulated, tailored financial advice regarding your situation, please consult an independent financial adviser.
National Insurance (NI) is effectively another kind of income tax, even if the UK government might not refer to it as such. The primary differences between NI and Income Tax include:
● NI is only levied on your salary if you are employed, or your self-employed profits.
● Income Tax, however, is due to on your salary and other sources of income, including pension income and rental income (e.g. from Buy To Let).
● Income Tax is paid solely by you – the taxpayer. NI, on the other hand, is paid by both you (the employee) and your employer.
Whilst the money from Income Tax is used by the UK government for a wide range of purposes, the revenues from NI are used primarily to help fund social benefits. This includes things like the state pension, maternity pay, sick pay and the NHS.
In 2019-20, NI is obligatory if you are a UK taxpayer over the age of 16. However, the amount you pay depends on your circumstances, and there are legitimate ways to reduce your NI bill if you are looking to free up more of your income.
What follows is a short guide on National Insurance, which we hope you find helpful. If you would like to speak to a financial adviser here at Cedar House about improving your tax situation, then do get in touch to arrange a free, no-commitment financial consultation.
How National Insurance Works
The amount of NI you pay is largely determined by your earnings. Generally speaking, most people tend to fall into one of four categories when it comes to their National Insurance Contributions (NICs):
● You will likely need to pay Class 1 NICs if your earnings fall between £166-£962 per week. The amount you pay is equivalent to 12% of your earnings.
● For earnings over £962 per week, your NICs will likely be 2%. Regardless of how much you pay in NICs, however, your employer will likely sort all of this out for you via the Pay As You Earn (PAYE) system.
● If you are self-employed in 2019-20 and your profits exceed £6,365 per year, then you will likely need to pay Class 2 NICs, which is equivalent to £3 per week.
● If your profits are over £8,632 per annum, however, then you will likely need to pay Class 4 NICs. Profits between £8,362 and £50,000 will need to pay 9% in NICs; any profits over that amount is 2%.
Self-employed people will need to state their NICs using a tax return (Self-Assessment).
NICs and the State Pension
In 2019-20, the revenues from the workforce’s NICs are mainly used to fund the state pension currently received by many in the retired population. Eventually, when you retire, others’ NICs will hopefully also help to cover your expenses in retirement via the state pension.
In the present tax year, the rules state that you need to accrue at least 35 years of qualifying NICs on your record to be eligible for the full new state pension, which is £168.60 per week (i.e. £8,767.20 per annum). Whilst this is unlikely to fully cover most people’s required income during retirement, it is certainly no small amount to turn your nose up at.
So, if you are currently unsure whether you will accrue at least 35 years of NICs before you plan to retire, it might be worth discussing your options with an experienced financial adviser. In certain cases, you can “top-up” some of your previous years where you have fallen short of qualifying for the full year, using Voluntary National Insurance Contributions. In other cases, it might be appropriate to discuss the option of delaying your retirement and working a bit longer, to build up more qualifying years of NICs.
There are some strategies you can immediately consider if you are wondering about ways to fairly make NICs, without overpaying. One approach is simply to check whether you are on the right tax code. On your payslip, you should see three digits followed by a letter, such as “L” or “BR”. If you see an “L” then that means you are entitled to a tax-free Personal Allowance of £12,500 in 2019-20. However, in certain cases, people who are entitled to this allowance might find themselves on an emergency tax code. Speak to your employer or accountant if you have any concerns or questions on this front.
Other options to consider with your financial adviser include:
● Reducing your salary and increasing income from dividends. If you run a limited company and receive a share of the company profits, then in 2019-20 neither you nor the business itself will need to pay NICs on this dividend income.
● Salary sacrifice schemes. Here, you agree with your employer to reduce your salary in exchange for extra benefits from your employer, such as workplace car parking or childcare vouchers.
● Salary sacrifice for increased employer pension contributions. Similar to the previous idea, here you request a reduction in your salary which is equal to the amount you pay in pension contributions. In return, your employer agrees to increase their contributions to your pension pot, which would be equal in value to your salary reduction. This would have the effect of reducing both yours and your employer’s NICs.
Bear in mind, however, that each of these strategies carries significant implications and should not be pursued lightly without prior consultation with your financial adviser. For some people, certain approaches may be appropriate whilst others might not be suitable.
If you would like to discuss your financial options with our financial advisers here at Cedar House, then get in touch today to arrange a free, no-commitment consultation.