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National insurance planning
A two-part payment by both the employee and employer, the contributions are based on a percentage of earnings including most benefits. The employees' contributions are deducted from wages and salaries together with PAYE deductions, but are not allowable against income tax. The employer's contribution is eligible for tax relief.
The principal difference between 'earnings' for national insurance contribution purposes and 'pay' for income tax purposes is that for NI there is no deduction in respect of contributions to a registered pension scheme. Earnings include:
- Certain benefits in kind
The following items are specifically excluded:
- Reimbursed business expenses actually incurred by the employee, and for which a proper receipt is available
- Redundancy payments
- Use of employer-owned or leased assets, e.g. houses
- Medical insurance (e.g. BUPA) arranged by the employer
Class 1 national insurance contributions are payable as follows:
|Nil on first||£120||£520||£6,240|
|0% on next||£63||£273||£3,276|
|12% on next||£779||£3,375||£40,508|
|2% over £962||£3,863||£50,024|
|Nil on first||£169||£732||£8,788|
|13.8% on balance||(no upper limit)|
Earnings between the lower earnings limit and the earnings threshold protect and entitlement to basic state pension and other contributory benefits without incurring any actual national insurance liability. Details of such earnings must be reported to HMRC under the RTI reporting system, even though no tax or NIC might be payable. The RTI returns must be filed on or before the payments of earnings are made.
Special rules, and a special class of NICs, apply to benefits in kind. Class 1A contributions are payable by employers only. These contributions apply to those taxable benefits which do not attract Class 1 contributions in respect of all employees (including directors).
The charge is worked out on an annual basis using the cash equivalent of the benefit (as for income tax). The amount of Class 1A contributions is calculated by using information recorded on forms P11D and applying the Class 1 employers' contribution rate for the relevant year (13.8% for 2020/21).
Once the amount of Class 1A contributions has been calculated it must be declared using form P11D(b). This form must be filed with HMRC by 6 July following the end of the tax year to which it relates. The Class 1A payment must be paid electronically by 22 July following the end of the tax year to which it relates, or 19 July if paid by cheque. In most cases a special Class 1A payslip will be sent to relevant employers in the first week of April.
Class 1A are now also due on certain redundancy payments.
Dividends instead of salary
You may wish to consider paying dividends rather than taking all your income as salary. Where directors are in receipt of a salary from a company, the NIC cost may be such that part of the payment could be more cost effectively made as a dividend. There are special rules for some companies providing personal services.
The decision on whether to pay a dividend or not is complex because the payment of a dividend may influence the value of the company's shares and therefore increase the liability to capital gains tax and inheritance tax. There is also a maximum amount that may be paid, based on the company's results.
Further strategies for minimising national insurance
Clearly there is more need than ever to mitigate NICs. Strategies are limited, but we can help you with ideas for saving employer and / or employee NICs including;
- Increasing the amount the employer contracts to contribute to company pension schemes
- Share incentive plans (shares bought out of pre-tax and pre-NIC income)
- For small companies, disincorporation and instead operating as a sole trader or partnership
- Paying less by the way of salary, more as a bonus to reduce employee (not director) contributions
- Paying dividends (the first £2,000 in 2020/21 is tax-free) instead of bonuses to owner-directors
- Provision of childcare (but childcare voucher schemes are no longer available)
Contact us if you would like further help or information on this subject.