In preparation for the Budget on March 23rd, we are publishing a series of posts from our Accountancy team, detailing the changes that will come into effect from April.
You’ve probably heard somewhere that there will be changes to National Insurance rates for the new tax year. But, do you know how they will affect you?
What follows is a quick guide to changes for the self-employed as of April 6…
National Insurance exemption raised
The first key change sees the threshold for paying Class 2 National Insurance Contributions (NICs) being raised. For 2010-11, you could earn up to £5,075 without paying NICs. From April 6, you can earn up to £5,315 without paying them. This is known as the Class 2 Small Eanrings Exemption.
Class 2 Contributions increased
However, when you are earning enough to be paying Class 2 contributions (i.e. earning £5,315 and above), there will be an increase in the amount you have to pay. For the current tax year (2010-11), NICs are made at a rate of £2.40 per week; from April 6, this will increase to £2.50.
Changes to Class 4 Lower Limit National Insurance
For 2010-11, the Class 4 Lower Limit was set at £5,715 per year and paid at eight per cent of earnings. This threshold is rising all the way to £7,225 from April 6 – but so is the percentage of NICs you will have to pay. It’s going up from eight to nine per cent.
Class 4 Upper Profits Limit is lowered
The Class 4 Upper Profits Limit is decreased from £43,875 to £42,475. And the current NIC rate of one per cent increases to two per cent. This is sometimes referred to as the ‘Upper Earnings Limit.’
What the changes mean for limited company owners
Ultimately, it depends on the salary you currently award yourself. Most freelancers, contractors and small business owners like to remain as tax efficient as possible, for obvious reasons.
The most tax efficient way of paying yourself as a limited company owner is to take a minimal salary combined with the profits (in the form of dividends) of your company. Knowing the tax thresholds is key to being able to do this. Other thresholds to be aware of include income tax and Corporation Tax (from the profits of your company).