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National Insurance Contributions for Small Businesses

Author: Anna Preston
by Anna Preston
Posted: Jun 10, 2016
national insurance

We all hate paying tax until we think about the benefits that are provided to citizens through the deduction of taxes but as a small business you need to be concerned about making sure all taxes are properly deducted. That means corporation tax for the business and also income taxes and National Insurance Contributions (NICs) for your employees. So tax codes for your employees have to be correct if they are not going to end up with an unexpected tax bill at the end of the year – or find out they have been paying too much tax all along.

National Insurance also needs to be dealt with properly because, although it is essentially just an additional tax the levels at which you pay it are not the same as for income tax and there is also a contribution required from the employer as well as the employee. According to an accountants in north london, if you are at all unsure of all the different tax regulations then it makes sense to seek some specialist small business advice.

NICs are used to provide the UK state pension, free at point of use health care and some other minor welfare schemes. Contributions are deducted at source from a salary in the same way as income tax and set at a particular percentage depending on your income. There is a maximum cap amount that any one individual is required to pay.

That sounds like it should be quite simple but as any accountant in the UK will tell you there are a number of errors that are easy to make when it comes to deducting the right amount of NI for your employees and the directors of your limited company, mainly because there are actually 5 different types of NICs

Class 1

This is calculated as a fixed percentage of an employee’s salary with an upper earnings limit to cap the amount paid. Employees pay the bulk of this NIC but employers also contribute towards it.

Class 1A

If you provide your employee with certain benefits they may be liable for this class of NIC. This is designed for employees that get special benefits as part of their job. A company vehicle is a prime example. In such circumstances, the employer must pay a special rate, which is calculated based on the value of the taxable benefits the employee has received throughout the tax year.

Class 2 – Class 2 contributions are designed for the self-employed. This is a compulsory rate, yet you are exempt if you earn below a certain limit.

Class 3 – Class 3 are voluntary NICs. If you have gaps in your NIC record you may want to pay some voluntary contributions in order to top it up. HMRC may actually get in touch with you to advise that you do so.

Class 4 – If you are self-employed and your profits are over a certain amount per annum you may need to pay Class 4 contributions as well.

So now you know a little bit more about the different types of National Insurance. As you can see, those who are self-employed have two classes of NICs to pay. For the current tax year, you will pay £2.75 per week in Class 2 NICs if you earn more than £5,885 per year. Class 4 NICs is calculated based on a percentage of your profits. You will pay nine per cent if you earn between £7,956 and £41,865. An extra two per cent is required on earnings more than £41,865.

Last but not least, things can also get a little bit confusing if you are a limited company director. As you are technically an employee of your company you have to pay Class 1 contributions and your company is also liable to pay the secondary contributions.

About the Author

The author has written and published articles on a wide range of topics including Small Business Advice, Tax and Accounting, Interior Design, House Renovation and Project Management.

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Author: Anna Preston
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Anna Preston

Member since: Apr 29, 2015
Published articles: 188

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