National Insurance: The other tax
National Insurance: The other tax
What class or amount you pay depends on your employment status: self-employed or employed.

By Helen Sewell, Accountant at Hive Business.

As I lay in my dentist’s chair the other day recovering from an excellent adrenalin rush courtesy of the anaesthetic needle, we got chatting.

What do you do? (accountant).
Where? (a practice up the road, specialising in dentists)
Really? (really).

She told me about her experience as an associate.

Ten years on, she was pretty well established and in the habit of saving each month for her tax bill. But in her first year, she was shocked that her accountant hadn’t prepared her for what her total bill was likely to be. He’d told her about income tax, but not national insurance (or payments on account). So the bill was considerably higher than what she was prepared for.

So let’s throw some light on this other tax: National Insurance (NI).

We pay National Insurance to qualify for certain benefits and the State Pension. What class or amount you pay depends on your employment status: self-employed or employed.

SELF-EMPLOYED

Class 2 – once you earn more than £6,205 per year, you pay £153.40 for the year.

To qualify for the new state pension when you retire you need 35 qualifying years. That’s 35 years of paying Class 2 contributions.

Steps you should take to secure your entitlement to the new State Pension

National Insurance Credits
If you don’t earn enough one year to make NI contributions, you may still be eligible for a NI Credit, which may put another qualifying year on your record.

A common way of receiving a national insurance credit is if you have been the primary carer of a child under 12 and have been in receipt of Child Benefit.

However, since HMRC in effect took away Child Benefit for those households in which someone earns more than £50,000 by introducing the High Income Benefit Charge, many have simply not bothered registering for Child Benefit in the first place. Why bother if you will have to pay it back again? But as this is the mechanism used by HMRC to record the primary carer’s NI credit, many have inadvertently lost qualifying years on their NI record.

To avoid this (one can only hope) unintended black hole, parents subject to the HIBC should still register for Child Benefit, then opt to stop receiving it.

Class 4 – once you earn more than £8,424 per year, you pay 9% (2% on profits over £46,350)

Class 4 NI contributions do not usually count towards state benefits. This is simply a profits tax. And so the well-known tax rates of 20% and 40% should really be thought of as 29% and 42% (so set aside this much for your tax bill).

When the Government talks about ‘tax free childcare’ or ‘before tax’ pension contributions or charitable donations they are only ever talking about income tax. There is no such relief for Class 4 NI. No wriggle room. No break. It’s a sneaky tax.

How you pay
As long as you’re registered with HMRC, both Class 2 and Class 4 contributions are included on your self-assessment tax return which is due by the 31st January each year.

EMPLOYED

Class 1 – once you earn more than £702.01 a month (per employment), you pay 12% (2% on earnings over £3,863 a month)

To qualify for the new state pension when you retire you need 35 qualifying years. That’s 35 years of paying Class 1 contributions.

National Insurance Credits
If you don’t earn enough one year to make NI contributions, you may still be eligible for a NI Credit, which may put another qualifying year on your record.

You will receive a credit on your NI record if you earn more than £503 a month. So between £503 and £702 a month, you won’t have to pay anything, but you will have a qualifying year on your record.

How you pay
Each month through PAYE.

We advise everyone to check your national insurance record. And talk to us if you need help. Call 01872 300232 or [email protected].

Helen Sewell
By Helen Sewell Accountant
If you have any questions or comments about this article, please get in touch.