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National Insurance Guide

The 2007 Budget Changes

Until now, the level at which NICs continue to be paid at 11 per cent (or 8 per cent for the self-employed) and the 40 per cent tax rate begins to bite have been different.

The 11 per cent rate finished “earlier” and just 1 per cent was raised on earnings above that. However, the Chancellor announced in his March 2007 Budget that from April 2009 the thresholds for income tax and NIC will become “aligned”.

This means that instead of having separate cut-off points the two – income tax and NICs – will be the same.

The earnings level at which the 40 per cent tax will hit will increase to £43,000, including the basic earnings allowance on which no income tax is paid. But so will levels of NI contributions.

So from 2009, you will pay 11 per cent NICs on earnings from about £5,225 up to £43,000. This could add more than £500 to your annual NI bill.

The Treasury forecasts that making NICs more like income tax will raise receipts by nearly £1.5bn by 2009.

Does anyone not pay National Insurance?

Aside from those not working, the other category that does not pay National Insurance is people of retirement age.

The exemption applies not just to pension income but also earnings from any work carried on past retirement age.

How to reduce the effect of National Insurance Contributions

There are not many ways of doing this.

• Salary sacrifice: one of the more popular methods is “salary sacrifice”.

This is where an employee foregoes an increase in his or her salary in return for increased employer contributions into an occupational pension.

Pension contributions are not subject to NI.

Salary sacrifice offers benefits for employers since they are also not liable to pay NI on contributions into a pension scheme.

• Set up a limited company: if you are self-employed and set up a limited company, you can pay yourself dividends instead of an income, thus avoiding National Insurance. You may still wish to pay yourself a minimum income in order to qualify for state benefits, payable to those who make NICs.

However, your company may be liable to a range of other taxes, so it is important to take professional tax advice first.


More pages

Page 1: Introduction
Page 2: The 2007 Budget Changes

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