AMS is a Swindon-based accountancy practice, specialising in supporting SMEs and contractors. In this column, Peter Bromiley, partner at AMS discusses the surprisingly costly world of National Insurance.
National Insurance (NI) is one of the most important, overlooked, taxes for most working people.
For 2017/18, for an employee earning between £11,500 and £45,000 per year, for every extra £1 they receive in net pay, the Treasury receives 67.35p(29.41p in Income Tax and 37.94 in NI (Employees NI of 17.65p and Employer’s, 20.29p). Quite shocking! This is often accepted with a shrug – because people think it goes towards their State Pension. In fact, NI goes to the Treasury like any other tax.
The plus points to paying NI:
If you pay some NI you get a Qualifying Year towards your State Pension (whether you pay 10p or £10,000) – and 35 Qualifying Years mean you get the full State Pension;
To claim Contributions-based Jobseekers Allowance, you have to have paid enough NI contributions in the previous two tax years to qualify.
But, generally NI is just another tax to avoid where possible.
The battle over employment status
Because NI is so important to the Treasury, the Government is constantly fighting a battle to define workers as employees (NI mostly at 25.8%) rather than self-employed (NI mostly at 9%). The recent Uber case – where drivers were classified as ‘workers’, rather than self-employed contractors – was very good news for the Treasury. Historically, some sought to minimise NI by operating through their own Limited Company, so they could avoid NI by paying themselves dividends (as shareholders in their own Company). But in 2000, the Government attempted to counteract this for Personal Service Companies by introducing a law known as IR35 – which seeks to collect tax from these Companies as if they were employees (although with no employment rights). This only proved partially successful so, since April 2016, many Limited Company contractors working in the Public Sector have had PAYE and NI deducted directly from their sales at source. This has not gone down well with many Public Sector contractors – including many NHS workers – with the result that many Public Sector projects are (as reported) now falling behind schedule as contractors leave for the Private Sector. And the battle continues…..