Chartered Management Accountants | Milton Keynes
A two-part payment by both the employee and employer, the contributions are based on a percentage of earnings including most benefits. The employees’ contributions are deducted from wages and salaries together with PAYE deductions, but are not allowable against income tax. The employer’s contribution is eligible for tax relief.
The principal difference between ‘earnings’ for national insurance contribution purposes and ‘pay’ for income tax purposes is that for NI there is no deduction in respect of contributions to a registered pension scheme. Earnings include:
The following items are specifically excluded:
Class 1 national insurance contributions are payable as follows:
|Nil on first||£118||£511||£6,136|
|0% on next||£48||£208||£2,496|
|12% on next||£796||£3,449||£41,392|
|2% over £962||£3,863||£50,023|
|Nil on first||£166||£719||£8,632|
|13.8% on balance||(no upper limit)|
Special rules, and a special class of NICs, apply to benefits in kind. Class 1A contributions are payable by employers only. These contributions apply to those taxable benefits which do not attract Class 1 contributions in respect of all employees (including directors).
The charge is worked out on an annual basis using the cash equivalent of the benefit (as for income tax). The amount of Class 1A contributions is calculated by using information on recorded of Forms P11D and applying the Class 1 employers’ contribution rate for the relevant year (13.8% for 2019/20).
Once the amount of Class 1A contributions has been calculated it must be declared using form P11D(b). This form, and the related payment, must be received by HMRC by 19 July following the end of the tax year to which it relates. In most cases a special Class 1A payslip will be sent to relevant employers in the first week of April.
You may wish to consider paying dividends rather than taking all your income as salary. Where directors are in receipt of a salary from a company, the NIC cost may be such that part of the payment could be more cost effectively made as a dividend. There are special rules for some companies providing personal services.
The decision on whether to pay a dividend or not is complex because the payment of a dividend may influence the value of the company’s shares and therefore increase the liability to capital gains tax and inheritance tax. There is also a maximum amount that may be paid, based on the company’s results.
Clearly there is more need than ever to mitigate NICs. Strategies are limited, but we can help you with ideas for saving employer and / or employee NICs including;
Contact us if you would like further help or information on this subject.
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