We’ll be the first to admit that news about National Insurance isn’t exactly exciting, but if you’re running your own business, self-employed or even on someone else’s payroll, it’s good to at least have some idea about what’s going on. After all, it’s always useful to have the facts about something that affects how much money you take home.
We take a look at some of the most recent changes that will affect you.
What is National Insurance?
First of all, let’s take a look at what National Insurance is all about. National Insurance is paid by everyone in the UK if you’re 16 or over and earning above £166 a week as an employee or if you’re self-employed and making a profit of £6,265 or more a year. These National Insurance contributions (NICs) help build up your entitlement to certain state benefits, such as the State Pension and Maternity Allowance.
How much you pay depends on your employment status and how much you earn.
- If you’re employed, you pay Class 1 NICs
- If you’re self-employed, you pay Class 2 and Class 4 NICs, depending on your profits.
Class 3 are voluntary contributions which you can pay to fill or avoid gaps in your National Insurance record. This is important as if you don’t have enough “qualifying years” you might not get the full State Pension. You can check your National Insurance record online to find out if you have any gaps and what to do about them.
How are National Insurance contributions changing?
At the end of January, Sajid Javid, Chancellor of the Exchequer announced that from April the government will raise the threshold for NICs, which, in effect means you can earn more, before you need to start paying NIC.
The new National Insurance limits for class one contributions will be:
- lower earnings limit: £6,240 per year
- Primary threshold: £9,500 per year
- Secondary threshold: £8,788 per year
- Upper earnings limit: £50,000 per year
This change in threshold will save a typical employee around £104 and someone who is self-employed approximately £78.
All other thresholds for 2020-2021 will raise with inflation, except for the upper earnings limit which will remain frozen at £50,000. These changes will have no changes or impact on state pension credits.
The reason the Chancellor has released this information now, is because there won’t be a budget until March 2020, and he wants everyone to benefit from this change as of April 2020. It underlines the government’s commitment to keeping tax low to ensure people keep more of what they earn. In fact, the government eventually wants to raise the National Insurance thresholds up to £12,500, but haven’t said when this will happen.
Class 2 National Insurance contributions will no longer be abolished
For those of you who are self-employed, you may recall that Class 2 NICs, which are payable on self-employed profits, were due to be abolished back in April 2019. The idea was to reform Class 4 contributions to include a new ‘Small Profits Limit’ threshold and basically make self-employed NICs more transparent and easier to understand. The reason for not abolishing Class 2 NICs was the realisation that it would have a detrimental impact on low earners and actually make the tax system more complicated!
The government is keeping this issue “under review”, but for now just remember Class 2 NICs will still be payable for the 2019/20 tax year.
Need more advice on National Insurance?
If you need any more advice on National Insurance, just give us a call or drop us an email. You might also want to take a look at the HMRC website, as they have lots of information on the different types of National Insurance classes and what benefits and pensions they contribute towards.