National Insurance is great. It builds up your state pension entitlement and helps pay for the NHS and other welfare services. Us freelancers pay National Insurance on a quarterly basis with the amount we pay dependent on how much we earn.
However, from April 6 the thresholds which affect the National Insurance Contributions (NICs) we pay will be changing.
Read on for a jargon-smashing (and possibly headache-inducing) guide…
The first thing you’ve got to understand is that self-employed people have different rates to those of PAYE employees. And the different rates you have to pay have names which seem to have been created by some automatic jargon generator. There are two main classes of NICs which apply to freelancers: Class 2 and Class 4.
Those exempt from paying National Insurance
As with income tax, there is a certain amount you can earn without having to pay National Insurance. This is known as the ‘Class 2 Small Earnings Exemption.’ However, some people do choose to make voluntary contributions for the sakes of building up their state pension.
For 2010-11, you could earn up to £5,075 without paying NICs. This threshold is being raised from April 6, so that you can earn up to £5,315 without paying National Insurance. Many limited company owners like to take a low salary and top up their pay from the profits of their company (in the form of dividends), in order to lower their National Insurance liability. However, you need to ensure your company is making enough profit – otherwise you will feel the wrath of the taxman.
Class 2 contributions will rise
When your earnings go beyond the exemption threshold, you enter the ‘Class 2’ contribution rate. So, from April 6, it’s only when earning above £5,315 that you have to pay your way. Which is good to hear. However, for those who are within the Class 2 bracket, the amount you have to pay will increase by 10p a week. For the current tax year NICs are £2.40 per week, but this will rise to £2.50.
Changes to Class 4 Lower Limit National Insurance
The next step up from Class 2 contributions is called the Class 4 Lower Limit. Like with Class 2, the amount you have to earn before it is applicable is rising for the new tax year. So, for 2010-11 those earning above £5,715 were inside the Class 4 Lower Limit and had to pay National Insurance at eight per cent of earnings. From April 6, the threshold is rising to £7,225. And accompanying this will be a percentage rise, so that those within the bracket will be paying NICs at nine per cent.
Changes for the big earners
While the above changes have involved increases to the thresholds, the final one is a decrease. The Class 4 Upper Profits Limit (sometimes referred to as the ‘Upper Earnings Limit’) comes down from £43,875 to £42,475. Earnings above this rate will now attract a two per cent National Insurance rate, as opposed to the previous one per cent.
For freelancers with limited companies, this information might affect the amount of salary they award themselves so that they remain at optimum tax efficiency.