Guide to National Insurance Planning
National Insurance was first introduced to the United Kingdom in 1911, this was originally a form of insurance against illness and unemployment. Over time, this evolved to include retirement pensions and a range of other benefits.
If you’re an employee, Income Tax and National Insurance is deducted from your salary before it is paid to you. If you’re a contractor, this is a little bit different.
What is National Insurance?
National Insurance contributions are a form of tax on earnings and are paid by both employees and employers. It entitles you to a range of state benefits, such as the State Pension and Maternity Allowance.
Whilst full-time employees have the comfort of knowing that their employer will manage their National Insurance, as a contractor this responsibility falls to you.
It is important for you to be aware of your responsibilities as a limited company director, so you can plan as effectively as possible.
National Insurance for limited company directors
If you are a limited company director, you are responsible for your National Insurance contributions and the rate which you are liable for will vary depending on earnings.
As dividend income is not subject to National Insurance, it may be tax efficient to take a salary and the remainder as a dividend. You will be responsible for your National Insurance. However, your accountant can help you with this process.
Age and income source
You will not need to pay National Insurance contributions once you reach retirement age, this is steadily rising for both men and women. From October 2020 the retirement age is 66, and will rise to 67 between 2026 and 2028. This is set to rise again to 68, however, the timetable is yet to be confirmed.
National Insurance is not payable on dividends, pensions or investment income. As a result, it may be better to take an income from your company in the form of dividends, rather than a salary.
More than one source
If you have an additional source of income, such as another job, each one will have a limit of £184 per week (2021/22). This only applies if each job is with an unrelated employer.
If you earn £150 in your second job, you will pay no National Insurance, as your earnings are below the threshold.
National Insurance can often be difficult to understand when you first become a contractor. Your accountant can help you to understand your responsibilities and assist with your finances.
Income Tax is charged at progressively higher rates on each portion of additional income. National Insurance, however, does the opposite.
Once your income passes the Upper Earnings Limit (UEL), any income over this figure will be deducted at a rate of 2%.
The Class 1 National Insurance thresholds for 2021/22 are as follows:
Lower Earnings Limit (LEL)
£120 per week
£184 per week
Upper Earnings Limit (UEL)
£967 per week
Benefits in kind
Employees can receive benefits in kind, in addition to their income. These benefits can include:
- Company car
- Medical insurance
- Subsidised meals
- Transport to get employees to and from work
Most benefits are subject to income tax, however most non-cash benefits are not subject to Class 1 National Insurance. So, if you are provided with £1,000 in cash, you will pay £200 in Income Tax and £120 in National Insurance, leaving you with £680. If you are provided £1,000 in benefit, you will pay £200 in Income Tax but no National Insurance, leaving you with £800.
National Insurance is not just a tax, it’s also a contribution towards the state pension. In order to qualify for a full state pension, you must have paid National Insurance for 35 years.
As a working life is usually over 35 years, you can miss a few years without it having an impact on your pension.
However, there have been a number of cases in which people retire and discover that they are not eligible for the state pension which they expected.
Unlike Income Tax, National Insurance is calculated for an earnings period. This can be for the whole year like Income Tax but is usually based on the frequency of your pay.
Earning periods can differ. For example, a salesperson may receive a monthly salary, quarterly commission, and an annual bonus. In this case, the earnings period is usually the shortest period. This means that a large bonus in one month could put some of your income into the 2% band, whereas it would be taxed at 12% if spread evenly throughout the year.
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