By Hayley Robins, Senior Accountant at Hive Business.
National Insurance (NI), much like tax, is something people generally just accept that we have to pay and don’t give it too much more thought, other than ‘it’s going to pay for my state pension when I retire’. This common thought isn’t strictly true, in essence, your contributions get lumped together with all other Governmental receipts and spent now, so there’s technically no “pot” when you come to draw your pension.
There are four main types of NI and each one applies to different circumstances:
12% of income – You will pay this if you’re employed. This rate is payable on income between £8,064 and £42,996. NI is payable at a rate of 2% on income above £42,996. As an employer, you will also need to make an NI contribution on behalf of your employees at a rate of 13.8%.
£2.80 per week – Self-employed individuals used to have to set-up a direct debit to pay this but HMRC now collect this along with your January tax payment. So you don’t need to do anything as your accountant will calculate how much you owe and advise you of your payment. For most people this will be £145.60 a year (£2.80 per week).
£14.10 – You can choose to pay this to avoid gaps in your ‘National Insurance Records’. Gaps mean you won’t have enough years of NI to get the full State Pension (sometimes called ‘qualifying years’). You may get gaps in your record if you don’t pay NI because your income was low or nil or you were living abroad.
9% of income – You will also have to pay this if you are self-employed. This rate is payable on income between £8,060 and £43,000. NI is payable at a rate of 2% on income above £43,000.
So… a few different types of NI, all payable at different rates and at different times. But once HMRC have collected the money what it is used for?
|Benefit||Class 1||Class 2||Class 3||Class 4|
|Basic State Pension||✓||✓||✓||X|
|Additional State Pension||✓||X||X||X|
|New State Pension||✓||✓||✓||X|
|Employment and Support Allowance||✓||✓||X||X|
As you can see, Class 4 NI contributions aren’t used for any state benefits. In effect, this 9% of your income that you hand over as a self-employed dentist is, in actual fact, just an extra sneaky tax.
This is why we cannot reiterate this message enough “you cannot rely on your state pension alone for retirement”. The Government have already warned us about this by forcing employers to pay into their employee’s private pension pot via the Auto-Enrolment legislation that has recently been introduced. It’s imperative that you have a plan for how you intend to fund your ‘golden years’.
If you would like help with your retirement strategy give us a call on 01872 300232 or email us at firstname.lastname@example.org.