National Insurance (NI) is a government initiative where contributions are paid by employers, employees and self-employed. The payment is used for various state benefits and services such as the NHS (National Health Service), state pensions, benefits to be drawn by unemployed and other social security aspects.
Contributors of National Insurance are individuals who are employed or self-employed and earning above a specific income threshold. These contributors fit into 4 classes:
- Class 1 – Employed and employers
- Class 2 – Self-employed individuals
- Class 3 – Voluntary contributions from individuals to cover any gaps in their NI which allows them to qualify for certain benefits
- Class 4 – Extra contributions from self-employed because of an increase in profits
The contribution of NI is calculated based on earnings and employment status. For employees, payment is deducted directly from their salary by the employer via their PAYE (pay as you earn) system. Self-employed professionals will pay their contributions through their self-assessment tax return.
This year the Government have introduced several changes to NI contributions with the focus of reducing the financial burden to employees and self-employed. Here is a summary of the changes:
Class 1 NIC – For Employees
As of 6th January 2024, the rate of NIC for Class 1 which was paid by employees decreased from 12% to 10% on earnings between £12,570 and £50,270. It is estimated that the reduction will save employees up to £450 annually after their tax payments.
Class 4 NIC – For Self-Employed
On 6th April 2024 the main rate of NIC for Class 4 was reduced from 9% to 6%. Also, any self-employed individuals where profits are above £12,570 no longer need to pay Class 2 NICs but will retain access to contributory benefits such as state pension. For any self-employed individuals with profits between £6,725 and £12,570 they will receive NI credits.
There are several considerations to highlight:
- It is important that employers update all their payroll systems to reflect these changes. This can involve changes with software updates (for online accounting tools) and administration adjustments.
- All employees must be kept up to date with these changes (many will not be aware of them). The most popular method for this is to explain the reductions in NI on an employee’s monthly payslip.
- There can be some special rules that apply for Directors, it is recommended to seek expert accountancy advice to understand these in more details.
In summary all these changes have been designed to help employees take more money home. Whilst also simplifying the tax process for the self-employed and helping to maintain their entitlement to benefits.
If you have any questions regarding national insurance contributions, then our team can offer both help and support. Please call us on 01173 700 079 or e-mail hello@steppingstonesaccountancy.co.uk.
You can also book a free 20-minute call with Yarka – https://calendly.com/yarka-ssa/20min
Leave a Reply