National Insurance is a deduction from earnings, set up originally to fund various State benefits such as the NHS, the State pension and other welfare-related schemes.
In reality, it is just another tax. In fact, as standard income tax rates have remained constant for many years, NI rates have soared.
In this guide we look at how National Insurance works, and what your National Insurance Contributions (NICs) will be as a small business person. The guide has been updated with the 2014/15 tax year NIC rates.
Overview of the different National Insurance types
Paid by employees and employers. These are calculated as a percentage of your wages, up to an upper earnings limit. This is the most common NIC type. The primary contribution is paid by the employee, the secondary by the employer.
A ‘special rate’ paid by your employer if you get certain benefits with your job, such as a company car. The amount you need to pay is worked out on the value of taxable benefits you have received during the tax year. It is payable in the July after the end of the tax year.
A compulsory rate paid by the self-employed. You are exempt if your earnings are below a certain limit.
Voluntary Contributions. You can pay these to help fill gaps in your national insurance contribution record. HMRC may get in touch with you to suggest to top up your contributions.
You may have to pay Class 4 contributions if you are self-employed and your profits are over a certain amount each year.
NICs for sole traders (self-employed)
Sole traders pay income tax on their business profits (as self-employed individuals). In addition to income tax, self employed workers are liable to pay National Insurance Contributions (NIC’s).
Sole traders pay Class 2 and Class 4 NIC’s and are required to pay contributions from the first day of self-employment.
NIC’s are deducted from your gross earnings, assuming the figures are above the lower earnings threshold.
Individuals who run a business via a partnership arrangement are taxed in the same way as sole traders.
Class 2 National Insurance Contributions are £2.75 per week for the current tax year (2014/15), and are paid by anyone earning £5,885 or more through self-employment during the tax year.
Class 4 National Insurance Contributions are paid on any profits you make as a self employed person. The rate paid for the 2014/15 tax year is 9% on all earnings between £7,956 and £41,865, and 2% on earnings above £41,865 p.a.
Limited company directors
Unlike sole traders, for tax purposes, if you are a director of a limited company, you are an ‘employee’ of the company. You are therefore liable to pay Class 1 NIC’s on your earnings. The limited company is also liable to pay Class 1 NIC’s as your ‘employer’.
Employees (Primary Class 1 Contribution) pay 12% on earnings between £153 and £805 per week, and 2% above £805 per week for the 2014/15 tax year. For the 2013/14 tax year the comparative thresholds for this class of NICs were £149 and £797 per week.
Employers (Secondary Class 1 Contribution) pay 13.8% on earnings above £153 per week in 2014/15 (£148 per week for 2013/14).
These NIC deductions should be paid to HMRC by the 19th of each month, unless payments are low, where you may be able to pay quarterly.
Limited Company directors and other employees may also have to pay Class 1A NIC’s for ‘benefits in kind’ such as company car provision. Your accountant will declare such benefits each year on your P11D form.
You will typically be allowed a few extra days beyond the traditional cheque deadlines if you pay your liabilities electronically.