NI, with rates lower than Income Tax, Corporation Tax, and VAT, can be seen as the unimportant poor relation of your Self Assessment payment, but far from it – its important for your benefit entitlements, and adds perhaps a third onto a typical tax bill.
First, lets look at the various classes of National Insurance (NI) and how they work. All figures are 17/18 rates.
Class 1 – This is the NI paid by employees and employers – in essence, if you have a job, the NI deducted from your wages.
Primary Class 1 NI is deducted from wages, at 12% on earnings over £157 a week and at 2% on earnings over £866 a week
Secondary Class 1 NI is paid by employers, and thus sometimes called a “tax on jobs” – the rate is 13.8% on weekly pay over £157
A couple of tips:
- If you earn between £113 and £157 a week, you pay Class 1 at 0% – this means the income counts for benefit and pension purposes.
- If you are a company director, its often best to take a smaller salary and maximise dividend instead to save NI, but take advice on this.
Class 2 – This is a weekly charge of £2.80 on Self Employed profits. Its only due if your profits (income less expenses) are over £6,025 (17/18).
Class 2 NI is being abolished from April 2019 and merged with Class 4.
Class 4 – This is an annual variable charge on business profits, compared to the fixed Class 2. Once Class 2 is abolished, Class 4 is being reformed to incorporate Class 2.
Class 4 is due at 9% on profits over £8,164 a year, and 2% on profits over £45,000.
Class 3 NI – This is a voluntary NI payment for those not earning enough to pay NI and who want to protect benefit and pension rights – see HMRCs guide to Voluntary NI. It is worth considering a voluntary NI contribution if you haven’t paid enough NI in any given tax year to get a credit toward State Pension – again see HMRCs guide. If you are Self Employed then, at present, the easiest solution is to pay Class 2 voluntarily on your Self Assessment return by ignoring the option to claim the £6,025 Small Earnings Exception.
National Insurance Credits – in certain circumstances you can get credits for NI, the most common of these is if you are registered for child Benefit (even if you don’t receive it, eg because you or your partner earns to much) – see HMRCs guide to National Insurance Credits
Secondly, what does paying National Insurance give you?
Well, in the main access to contributory state benefits, including Job seekers Allowance (not the self employed), Maternity Allowance / Benefit and State Pension – its the latter, State Pension, which is arguably the most important and costly if you miss out on it.
State Pension – this is more complex than desirable, but is based around NI contributions
Men born before 6 April 1951 and women born before 6 April 1953 potentially qualify for the Basic State Pension – broadly you must have paid, or have credits for, NI for 30 years to qualify. The Basic State Pension is £119.30 a week, but possibly supplemented by Additional State Pension
People born after these dates potentially qualify for the New State Pension – here the qualifying rules are more complex. If you start paying NI after April 2016 then its a minimum of 10 years for any pension, and 35 years for a full pension, again payment or credits. People who started paying NI before April 2016, but were born after 1951/1953 will get the higher of either (a) what they would have been entitled to under Basic State Pension (see above) or (b) what they would get if the rules or the New State Pension has been in place at the start of their working life. The New State Pension £155.65 a week.
The pension amounts given may be reduced if your contributions record was to short or, for Basic State Pension, if you were contracted out.
Lastly, lets look at Voluntary NI
Entitlement to State Benefits, primarily pension, is currently generated from either:
- Class 1 NI from an employment / job – confusingly, no NI is due on weekly earnings of less than £113, and NI is payable at 12% on weekly earnings over £157 – between £113 and £157 you pay NI at 0%, meaning the threshold for benefit entitlement is £113 a week even if there is no actual NI deduction from your payslip.
- Class 2 NI from self employment – note class 2 only cuts in on profits over £6,025 (17/18)
- NI credit as a carer or parent – see see HMRCs guide to Voluntary NI
If you don’t pay NI / get a credit from one of the sources above for each week/month, the a voluntary NI payment may be sensible.
If you are self employed but earning less than the £6,025 threshold, then the easiest and cheapest solution is to pay a voluntary Class 2 contribution – £2.85 week (17/18)
If you are not self employed then you would need to pay voluntary Class 3 contributions which are more expensive – £14.25 week (17/18)
As you get older its worth getting a state pension forecast from HMRC to see how many more years you need to pay for a full pension – whilst there is no exemption from paying NI once you have accrued a full pension, there is no need merit in making voluntary contributions at this stage.
Note from 2019 its proposed that class 2 and class 4 NI for the Self Employed will be combined into a revamped class 4 which will then give benefit and pension entitlement instead of Class 2.
What about if you have both employed and self employed income?
- If you are paying NI on your employed income P60 for 52 weeks of the year and your self employment is below the threshold, then you will get your benefit entitlements including state pension accrual from that NI. If your self employed income is below the NI threshold thats fine, but if its over, you still need to pay NI on self employment.
- However if your employment is part time and doesn’t trigger NI, then if your self employed income triggers NI that will cover you, but if your self employed NI isn’t high enough to trigger NI also, consider paying, via the self assessment, a voluntary NI Class 2 payment.
There are two major aspects to NI planning:
- First, voluntary NI if you are not otherwise paying NI and want pt preserve your State Pension rights – and remember these are currently transferable within Europe, and presumably will continue to be so post Brexit. If you are Self Employed then a voluntary Class 2 payment is much cheaper than a voluntary Class 3 payment.
- If you work through a company, then make sure directors salaries – and spouse salary if relevant – arr enough to take you into the 0% Class 1 band.
Finally, if all these talk of different classes of NI and voluntary NI is leaving your eyes spinning, then talk to us for practical pointers.