National Insurance

There are currently four types of National Insurance, Class 1 (for the employed), Class 2 and Class 4 (for the self-employed), and Class 3 (for those who pay voluntary contributions). Class 2 is due to be abolished from 6th April 2018.

This document explains each Class and what National Insurance is for.

[hidden title="About National Insurance"]

National Insurance (NI) is like a tax but the money raised provides for some of the main benefits of the social security system, such as the State retirement pension, sick pay, and maternity pay. NI contributions are usually paid when people work between the age of 16 and the State retirement age (currently 65 to 67). There are different rules for payment depending on whether you work as employed, self-employed, or choose to pay voluntary contributions.

Most illustrators are self-employed – they work for themselves. Some form their own limited company and work through that, being treated for NI purposes as an employee.

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[hidden title="National Insurance and Pensions"]

Needless to say, the detailed rules get quite complicated. However, in general terms, it takes ten years of contributions to start to get entitlement to the State retirement pension – you will then be eligible for 10/35ths of the full State pension; from then on, every year`s contributions will give you an extra 1/35th of the full State pension. Once you have contributed 35 years’ contributions (including contributions credited to you if you are not working because you are looking after children full-time as a parent), you will be entitled to the State pension in full.  The other benefits that arise from paying National Insurance will be available to you after a year (or less) of contributions.

There are special rules if you are working abroad for an extended period and become non-UK resident for tax and NI purposes.

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[hidden title="Class 1 National Insurance"]

If you are employed – working as an employee for someone’s business or working as a director in your own limited company – you will pay Class 1 NI. There are various thresholds, which change almost every tax year, on the 6th April. For the 2017/18 tax year (covering the period 6th April 2017 to 5th April 2018), for each employment you have:

  • if you earn less than £5,876 in the year (£489-66 in a month or £113 in a week), you do not pay NI but you do not get any of the benefits. Your employer does not pay NI either.
  • if you earn between £5,876 and £8,164 in the year (£489-66 to £680-33 in a month or £113 to £157 in a week), you do not pay NI but you ARE entitled to the benefits. Your employer does not pay NI either.
  • if you earn between £8,164 and £45,000 in the year (£680-33 to £3,750 in a month or £157 to £865 in a week), you pay “employee`s” NI at 12% on every £ you earn in this band; your employer will pay at a rate of 13.8%.
  • if you earn more than £45,000 in the year (£3,750 in a month or £865 in a week), you pay “employee`s” NI at 2% on every £ you earn above this figure; your employer still pays at a rate of 13.8%.

Class 1 NI contributions (like tax) are automatically taken off your salary by your employer before you receive your net pay.

Class 1 (“employee”) contributions are higher than self-employed NI contributions because they give eligibility to a number of additional benefits, such as job-seekers allowance.

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[hidden title="Class 2 National Insurance"]

Most illustrators are self-employed (work freelance), so this and Class 4 NI will be of direct relevance to the largest number of you! As mentioned above, Class 2 is due to be abolished from 6th April 2018.

Once you have registered with HM Revenue & Customs (HMRC) – which you should do (online) within three months of starting your self-employment or face a £100 penalty, Class 2 and Class 4 NI will be collected at the same time as the tax as a lump sum once or twice a year on 31st January and/or 31st July. HMRC (or your accountant) will calculate how much you have to pay; it is then your duty to make sure you pay the right amount at the right time – to avoid interest and penalties.

Note also that both Class 2 and Class 4 contributions are NOT tax deductible against your business income when you are calculating your profit. Just as with your self-employed tax bill, you must be disciplined and put money aside throughout the year as you earn it, to pay your NI liability on the due dates.

Visit the HMRC website (“paying HMRC”) for information on how to pay your Class 2 and Class 4 (and tax) liability. It gives HMRC bank account details; bank to bank transfer is usual.

Note that, for both Class 2 and Class 4 NI, if you are a UK resident for tax and NI purposes, you must declare all of your worldwide freelance income to HMRC.

Just as with Class 1 NI, there are various thresholds for Class 2. Again, these change almost every tax year, on the 6th April. For the 2017/18 tax year (covering the period 6th April 2017 to 5th April 2018):

  • if your profit (sales less allowable business expenses) is less than £6,025 in the year, you do not have to pay Class 2 NI but if you don`t, you won`t get any of the benefits. You can, if you wish, pay voluntarily and most people would in this circumstance.
  • if your profit is more than £6,025 in the year, you pay Class 2 contributions of £148-20 in the year – and this gives you entitlement to the benefits.

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[hidden title="Class 4 National Insurance"]

Class 4 is also paid by the self-employed – and after 6th April 2018, will be the only form of National Insurance that is paid by the self-employed.

Class 4 NI is collected at the same time as self-employed tax – as a lump sum once or twice a year on 31st January and/or 31st July. HMRC (or your accountant) will calculate how much you have to pay; it is then your duty to make sure you pay the right amount at the right time – to avoid interest and penalties.

Again, just as with Class 1 NI, there are various thresholds for Class 4 – which have a habit of changing almost every tax year, on the 6th April. For the 2017/18 tax year (covering the period 6th April 2017 to 5th April 2018):

  • if your profit (sales less allowable business expenses) is less than £8,164 in the year, you do not pay Class 4 NI.
  • if your profit is between £8,164 and £45,000 in the year, you pay Class 4 contributions at 9% on every £ you earn in this band. From 6th April 2018, these contributions will give you entitlement to the benefits.
  • if you earn more than £45,000 in the year, you pay Class 4 NI at 2% on every £ you earn above this figure.

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[hidden title="Class 3 National Insurance"]

If you are not eligible to pay National Insurance as an employee or as a self-employed person, you can still become eligible for the benefits of the NI system by paying Class 3 (“voluntary”) contributions. The cost is £14-25 a week or £741 for the year.

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This resource has been prepared by Nick Weeden, Chartered Accountant.  All members are entitled to an hour’s free consultation with Nick.  To book yourself in, email the AOI.

 

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