National Insurance is another form of taxation, which is paid by most people at some time from the age of 16 to reaching the state retirement limit. The contributions collected by the Treasury are intended to pay for health care, unemployment, the state pension and other projects.
However, the rates of National Insurance Contributions (NIC) continue to rise, which can have a negative impact on the owners of small businesses.
What are the types of National Insurance?
Class 1
Employees pay a percentage of their income up to an upper earnings limit as Class 1 NIC. This is the most common form of NIC and is deducted from salaries by the employer. Firms also pay NIC for any members of the workforce that earn £156 or more per week, with the rate set at 13.8%.
Class 2
Anyone who is self-employed pays Class 2 NIC. If profits are below the Small Profits Threshold of £5,965 per year, no Class 2 NIC is paid. However, if a self-employed person wants to pay National Insurance, they may pay Class 3 NIC. Profits from £5,966 upwards attract a rate of £2.80 per week, with the amount due on a monthly or six-monthly basis.
Class 3
This is a voluntary National Insurance payment, generally paid by those who have gaps in their records. The cost is £14.10 per week.
Class 4
Class 4 NIC is calculated when you complete and submit your self-assessment tax return for the year. You will pay the amount owed at the same time as your income tax bill. For profits that are between £8,060 and £42,385, the NIC is deducted at 9%. For any profits above £42,385, the percentage deducted is set at 2%.
Paying NIC as a sole trader
Sole traders, which includes anyone who is self-employed as an individual or is a partner in a partnership, pay Class 2 and Class 4 NIC, dependent on the level of profits.
Paying NIC as the director of a limited company
If you are a director of a limited company and pay yourself a wage, you will submit NIC as an employee of the company, paying in the Class 1 category. As the employer, the limited company will also pay the employer rate of Class 1 NIC.
There are various rules surrounding National Insurance, so guidance may be required from an outsourced accountancy firm. If you would like to discuss any issues with NIC, please contact us for more information.