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National Insurance

National InsuranceNational Insurance Contributions (NICs) are payable whether you are self-employed or employed by your own company, although different rules and rates apply. National Insurance contributions can significantly increase the amount of tax you pay.

Although it can affect your entitlement to some state benefits, you will almost certainly want to minimise the total National Insurance contributions you and your business pay.

Effective tax planning may allow you to reduce your National Insurance contributions, so seek professional advice – an accountant can help you as part of your overall tax planning.

NICs for the self-employed

National Insurance contributions for the self-employed are in two parts. You pay a flat rate of Class 2 National Insurance contributions regardless of how profitable your business is (though low-earning businesses can be exempted altogether). You also pay Class 4 National Insurance contributions calculated as a percentage of your annual profits above a basic threshold.

National Insurance contributions are calculated and collected as part of your self-assessment tax return. While the detailed calculations will vary, total National Insurance contributions for the self-employed might be about 10% of earnings.

NICs for employers and employees

Both employers and employees have to pay Class 1 National Insurance contributions. National Insurance contributions are collected through the PAYE system used for payroll tax deductions.

Employers pay Class 1 National Insurance contributions as a percentage of any employee’s earnings above a basic threshold. Employers also pay Class 1A National Insurance contributions on any taxable employee benefits they provide.

Employees also pay Class 1 National Insurance contributions on their earnings above the threshold. The rates used to calculate employees’ and employers’ National Insurance contributions differ, but the total combined charge typically represents a rate of more than 20% on earnings above the threshold.

Minimising NICs

The different rates of National Insurance contributions can mean you will pay less if you are self-employed rather than an employee of your own company.

If you operate as a company, you may be able to draw money in the form of dividends — on which National Insurance is not normally payable. But special anti-avoidance rules mean that in some circumstances payments like this are taxable (and subject to National Insurance contributions) in the same way as employment income.

The most tax-efficient option will depend on your exact circumstances, and how the different tax rates and thresholds affect not only National Insurance contributions, but also income tax and/or corporation tax. You should also bear in mind that the legal structure of your business can have other important consequences, such as whether you could be held personally liable for business debts.

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