Last month ministers launched plans for a £2,000 national insurance cut for small businesses.
David Cameron marked the introduction of the National Insurance Contributions Bill with a tour of small businesses in the east of England. The tax cut will be in place by April next year and the government said 90% of the benefit would be felt by firms with fewer than 50 employees. The Prime Minister said the tax cut would save 1.25 million businesses £2,000 per year - and mean 450,000 of them will have their national insurance (NI) bills eliminated entirely.
With the government’s plan of the tax cut in the news, we thought a quick overview of how to best manage your NI contributions would be of interest.
Firstly, you pay NI contributions so that you are entitled to certain state benefits like basic state pension, additional state pension, maternity allowance, contribution-based jobseeker's allowance, bereavement allowance and contribution-based employment and support allowance. Most people who work have to pay NI contributions unless they are one of the groups who are exempt from the system. You need 35 years of full NI contributions to qualify for the state pension.
So how can you legally minimise your NI contributions?
Here are the top 8 ways to lower your national insurance liability:
- Self-employed people with small earnings exception:
If your earnings are below £5,725, during the period from 6th April 2013 to 5th April 2014, you may claim “small earnings exemption” and not pay Class 2 national insurance contributions. However, if you are self-employed and get Jobseeker’s Allowance (JSA) you may be awarded JSA credits but you remain liable for Class 2 NICs.
- Owner directors
Make sure that you keep your salary below the annual secondary national insurance threshold. Also, pay dividends instead of bonuses to directors.
- Benefits and allowances:
There are known benefits that can be provided tax free such as mobile phones, applicable mileage rate, possibly vans (subject to usage), and pensions as well.
Note:additional tax or NI may be payable if benefits are provided by an employer to an individual for items such as company cars, fuel and medical reimbursements.
For some businesses, it may be advisable to operate as a limited company to avoid the 9% NI class 4s assessable under self-employment. However, consult a professional advisor before you take any steps.
- Non-director contributions:
To reduce employee (non-director) contributions, you may pay a bonus instead of more salary.
If you own or control all the shares in your company then drawing money in the form of dividends - on which national insurance is not normally payable - might help reduce your liability.
- Childcare vouchers:
Childcare vouchers, up to a limit of £55 per week, or £243 a month, are exempt from national insurance contributions for employers and exempt from tax and NI contributions for employees. As an employer, you will therefore reduce some of your business costs and your employees will make savings on their childcare costs.
- Salary sacrifice for tax free benefits:
Under a salary sacrifice arrangement an employee loses some of their contractual entitlement to cash pay. Usually this is in return for new or increased entitlements to non-taxable benefits such as those mentioned in point 3 and point 7.
The things outlined above might help reduce your NI contributions bill, but there are some things which will not have an impact. In order thoroughly understand income tax and make the right choice for your circumstances, it is important to talk through your options with an independent, professional accountant. Also it is important to check the accountant's qualifications.