National Insurance

Directors are classed as employees and pay National Insurance on annual income from salary and bonuses that exceed the Primary Threshold. The annual threshold is pro-rated to £11,908 this year following the increase to £12,570 from 6 July 2022 (£9,880 from 6 April 2022 – 5 July 2022). The primary threshold from 6 April 2023 will be £12,570.

Many director shareholders take a minimum salary and any balance of remuneration as dividends. This tends to reduce National Insurance Contributions (NICs), and in some case Income Tax. The planning strategy is to pay a salary at a level that qualifies the director for state benefits, including the State Pension, but does not involve payment of NICs.
 
A director’s liability to NI is worked out based on their annual (or pro-rata annual) earnings. This differs from regular employees whose liability is calculated based on their actual pay period, usually weekly or monthly. Payments on account of a director’s NICs can be made in a similar way as for other employees. However, an annual adjustment must be made at the end of the tax year.

Directors, who are first appointed during a tax year, are only entitled to a pro rata annual earnings band which depends on the actual date appointed and the amount of time remaining in the tax year. Care needs to be taken in these circumstances to avoid an unexpected liability to pay NIC.

National Insurance credits can help qualifying applicants to fill gaps in their National Insurance record. This can assist taxpayers to build up the number of qualifying years of National Insurance contributions which can increase the amount of benefits a person is entitled to, such as the State Pension.

This could happen if someone was:

• employed but had low earnings;
• unemployed and were not claiming benefits;
• self-employed but did not pay contributions because of small profits; or
• living or working outside the UK.

National Insurance credits are available in certain situations where people are not working and therefore, not paying National Insurance credits. For example, credits may be available to those looking for work, who are ill, disabled or on sick pay, on maternity or paternity leave, caring for someone or on jury service.

Depending on the circumstances, National Insurance credits may be applied automatically or an application for credits may be required. There are two types of National Insurance credits available, either Class 1 or Class 3. Class 3 credits count towards the State Pension and certain bereavement benefits whilst Class 1 covers these as well as other benefits such as Jobseeker’s Allowance.

Taxpayers may be able to pay voluntary contributions to fill any gaps if they are eligible.

HMRC offers an online service to check your National Insurance Contributions (NIC) record online. In order to use the service, you will need to have a Government Gateway account. If you don't have an account, you can apply to set one up online.

By signing in to the 'Check your National Insurance record' service you will also activate your personal tax account if you haven’t already previously done so. HMRC’s personal tax account can be used to complete a variety of tasks in real time such as claiming a tax refund, updating your address and completing your Self-Assessment return.

Your National Insurance record online will let you see:

• What you have paid, up to the start of the current tax year (6 April 2022)
• Any National Insurance credits you’ve received
• If gaps in contributions or credits mean some years don’t count towards your State Pension (they aren't 'qualifying years')
• If you can pay voluntary contributions to fill any gaps and how much this will cost

In some circumstances it may be beneficial, after reviewing your records, to make voluntary NIC contributions to fill gaps in your contributions record to increase your entitlement to benefits, including the State or New State Pension. If you think this might be relevant, please do not hesitate to get in touch.

If you do not already have a National Insurance number you will normally need to apply for one if you are planning to work in the UK, claim benefits, apply for a student loan or pay Class 3 voluntary National Insurance contributions. It can take up to 4 weeks for a National Insurance number to be issued after you have proved your identity.

HMRC’s guidance states that you can apply for a National Insurance number if you:

• live in the UK;
• have the right to work in the UK; and
• are working, looking for work or have an offer to start work.

However, you can start work without a National Insurance number if you can prove you can work in the UK. You can also apply for benefits or a student loan without a National Insurance number. If a National Insurance number is required, you will be notified at the time.

Most teenagers in the UK are automatically sent a letter just before their 16th birthday detailing their National Insurance number. These letters should be kept in a safe place. It should be noted that a National Insurance number remains the same for life, even if your personal details change.

Directors are classed as employees and pay National Insurance on annual income from salary and bonuses that exceeds the Primary Threshold. The annual threshold is pro-rated this year following the increase to £12,570 from 6 July 2022 (£9,880 from 6 April 2022 – 5 July 2022).

Many director shareholders take a minimum salary and any balance of remuneration as dividends. This tends to reduce National Insurance Contributions (NICs), and in some case Income Tax. The planning strategy is to pay a salary at a level that qualifies the director for state benefits, including the State Pension, but does not involve payment of any NICs.
 
A director’s liability to NI is worked out based on their annual (or pro-rata annual) earnings. This differs from regular employees whose liability is calculated based on their actual pay period usually weekly or monthly.  Payments on account of a director’s NICs can be made in a similar way as for employees, however, an annual adjustment must be made at the end of the tax year.

Directors, who are first appointed during a tax year, are only entitled to a pro rata annual earnings band which depends on the actual date appointed and the amount of time remaining in the tax year. Care needs to be taken in these circumstances not to incur an unexpected liability to pay NIC.

There are a number of considerations to consider when setting the most tax/NIC efficient salary.

Class 1A NICs are paid by employers in respect of most benefits in kind provided to employees such as a company car. There is no employee contribution payable. If you provided taxable benefits to staff or directors your business is likely to have a Class 1A employers’ NIC liability. The deadline for paying class 1A NICs is 22 July 2022 if payment is made electronically (or 19 July 2022 if paying by cheque). 

The deadline for submitting the 2021-22 forms P11D, P11D(b) and P9D is 6 July 2022. The forms can be submitted using commercial software or via HMRC’s PAYE online service. Making good payment by 6 July (for tax purposes) will also automatically remove or reduce the Class 1A NICs liability, as the payment will be made prior to the due date for paying Class 1A.

Class 1A NICs are due in respect of most benefits provided to:

• directors and certain other persons in controlling positions
• employees
• members of the family or households of the above.

Where a benefit is provided as part of salary sacrifice or other optional remuneration arrangement (OpRA), special rules apply and the Class 1A NICs are calculated as a percentage of the relevant amount. 

Certain conditions must apply before Class 1A NICs are due. These conditions are that the:

• benefit must be from, or by reason of, an employee's employment and must be chargeable to Income Tax under ITEPA 2003 on an amount of general earnings as defined at Section 7(3) ITEPA 2003
• employment must be 'employed earner’s employment' under social security law and employment as a director or an employee
• benefit must not already attract a Class 1 NICs liability.

In certain circumstances it can be beneficial to make voluntary National Insurance Contributions (NICs) to increase entitlement to future benefits, including the State or New State Pension for self-employed persons.

You might want to consider making voluntary NICs if:

• You are close to State Pension age and do not have enough qualifying years to get the full State Pension
• You know you will not be able to get the qualifying years you need to get the full State Pension during the remainder of your working life
• You are self-employed and do not have to pay Class 2 National Insurance contributions due to a history of low profitability
• You live outside the UK but want to qualify for benefits.

If you fall within any of these categories, it may be beneficial to apply for a State Pension forecast and examine whether you should consider making voluntary NICs to make up missing years, known as topping up. Not everyone will benefit from making voluntary NICs and much will depend on how close you are to retirement age and your NIC payments to date.

Usually, HMRC allow you to pay voluntary contributions for the previous six years. The deadline is 5 April each year. This means that you have until 5 April 2023 to make up for gaps for the tax year 2016-17.

There are also transitional measures in place that allow men born after 5 April 1951 and women born after 5 April 1953 to make up for gaps in NICs between tax years April 2006 and April 2016. This opportunity ends on 5 April 2023 when the maximum allowable number of voluntary contributions will be limited to six years as per the previous paragraph.

A new National Insurance Contributions (NICs) holiday for employers who hire former members of Her Majesty (HM) armed forces came into force on 6 April 2021. This allows employers to apply a zero-rate of secondary Class 1 Employer NICs on the earnings of veterans during the first year of their civilian employment post-service. The zero-rate applies up to the Veterans Upper Secondary threshold (currently £50,270 per annum).

From 6 April 2022, employers can now claim this relief in real time by submitting Real Time Information (RTI) returns. Employers who used this relief in 2021-22 can claim back the relief retrospectively for any qualifying employees who joined their company in the last 12 months.

Employers can claim this relief for the 12-month period starting on the first day of the veteran’s first civilian employment after leaving the regular armed forces.

An employee qualifies as a veteran if they have either:

• served at least one day in the regular armed forces
• completed at least one day of basic training

The relief is available to a veteran who has started their first civilian job regardless of when they left the regular armed forces.

The Minister for Defence People and Veterans said:

‘Our veterans have made important contributions to keeping our country safe. The skills they gain during service are invaluable, and businesses can greatly benefit from their dedication. I encourage all businesses to consider hiring veterans and supporting their journey to civilian life after service.’

In the recent Spring Statement, a significant increase in the National Insurance Threshold from £9,880 to £12,570 was announced. This increase will see the alignment of the Primary Threshold (PT) for Class 1 NICs and Lower Profits Limit (LPL) for Class 4 NICs with the personal allowance of £12,570. This change is effective from 6 July 2022.

The changes will come into effect from 6 July to allow payroll software developers and employers to update their software.

The self-employed pay NICs on an annual basis and at the end of the tax year means that the NIC threshold for Class 4 NICs will rise to £11,908 in 2022-23 before being fully in sync with the personal allowance of £12,570 2023-24. The £11,908 figure is calculated using 13 weeks of the NIC threshold allowance at £9,880 and 39 weeks of the threshold at £12,570. It has also been confirmed that the NIC and Income Tax thresholds will remain aligned going forward.

Further, for 2022-23, the point at which the self-employed start paying Class 2 NICs will increase to £11,908. This means that those with profits between the Small Profits Threshold (£6,725) and the LPL (£11,908) will not need to pay Class 2 NICs from April 2022 but will still be able to access entitlement to contributory benefits.

We would like to remind our readers that the increases in National Insurance Contributions (NIC) of 1.25% – first announced last year – will take effect from April 2022. These increases will be ring-fenced to provide funding for the NHS, health and social care.

The increases will apply to:

• Class 1 contributions (paid by employees) above the primary and secondary thresholds. This is the NIC that is deducted from your earnings by your employer.
• Secondary Class 1 (paid by employers). Employer's NIC contributions are paid as part of the regular PAYE/NIC payments unless they are covered by the present £4,000 employment allowance.  
• Class 4 (paid by self-employed). These contributions are added to your annual Self-Assessment statement.

Employers should ensure that they are prepared for the increase as these changes will increase wage costs from April 2022.

All existing NICs reliefs to support employers will continue to apply. In addition to the employment allowance, this includes the following:

• employees under the age of 21
• apprentices under the age of 25
• qualifying Freeport employees
• armed forces veterans

From April 2023, these increases will be incorporated into a new Levy. The Levy will be administered by HMRC and collected by the current channels for NICs – Pay As You Earn and Income Tax Self-Assessment.

Please note, at the time this article was written there has been significant political pressure in parliament to cancel this increase. We will advise if this challenge results in the withdrawal of the 1.25% increase.