- If you are a director of a limited company
and pay yourself or fellow directors or employees a salary,
then you could be potentially subject
to a double whammy of national insurance.
That is, you as a director pays national insurance,
personally, and your limited company
also pays national insurance.
So, the key for you is how could you mitigate
and manage your national insurance bill?
In this video, we will cover
why do you have to pay national insurance?
How does national insurance work
for small limited company business owners?
And finally,
how can you manage and reduce your national insurance bill?
Before I get into today's video,
be sure to visit our Accounting & Tax Academy
membership area, where you can get access
to exclusive in-depth courses, templates,
and calculators that will help you plan ahead
for national insurance and other taxes.
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For small limited company business owners,
the type of national insurance
you are potentially liable to, is known as class one,
which can be split into primary and secondary.
Primary national insurance is what is payable by you,
a limited company director or employee,
should your salary exceed the national insurance thresholds.
Secondary class one national insurance
is payable by your limited company on behalf of you,
the director, or any employees,
again, subject to salaries exceeding the thresholds.
But why do you have to even pay national insurance
on top of a load of taxes?
Well, national insurance contributions are collected
by HMRC's special national insurance office,
and are paid into a national insurance fund.
This fund is then used to provide
contributory social security benefits,
such as a state retirement pension
and other useful benefits shown on the screen.
Click on the link in the description box below
which outlines the different types of state benefits
that are available to you based
on your national insurance contributions.
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So, as a limited company director,
you are only permitted to play class one primary
and secondary national insurance if the following occur.
Number one, you actually get paid a director salary
and number two, your director salary exceeds
a class one primary threshold,
which I will discuss shortly in this video.
But firstly, here is a framework as to
how class one national insurance is applied:
As a director, you must be at least 16 years old or above,
and if you, as a director, reached the current pension age,
currently 68, at the time of this video,
then you no longer need
to pay class one primary national insurance
even if you are taking a salary
above the national insurance primary threshold.
National insurance is based upon your gross pay,
that is before any deductions,
although there are some exclusions to this.
And finally, as a director, your contribution is based on
what is known as the annual basis.
Now this basis can be beneficial,
as your national insurance is assessed
on an annualized basis.
So in other words, only once you reach the primary threshold
of earnings on a cumulative basis in the tax year,
does national insurance actually kick in.
For non-directors, national insurance is paid
on what is known as a proportional basis.
In other words,
from the first week or month you start earning,
under the assumption you will earn for a full tax year.
Class one primary monthly thresholds can be seen
on the screen for the current tax year,
with the primary threshold being the starting point
of earnings per month and the upper earnings limit
being the point where the main rate,
currently on screen, ends.
As always, to help you get a clearer understanding,
let's illustrate with an example.
In order to assist with this example,
we'll be referring
to HMRC National Insurance Rates and Allowances publication,
which you can easily access by following the link
in the description box below.
Let's assume your director salary
is 15,000 pounds per year, that is 1,250 pounds per month.
Then you, personally,
will start to pay class one primary national insurance
on earnings above 797 pounds per month at the rate of 12%.
So in this case, your national insurance liability
will be 54 pounds and 36 pence for the month
and subsequent months, should your salary remain the same.
But let's say your director salary
is 60,000 pounds per year,
that is 5,000 pounds per month gross.
You would still only start paying
class one primary national insurance
from 797 pounds per month up to the upper earnings limit
of 4,189 pounds per month at the rate of 12%.
So, for this band of earnings, your national insurance
liability will be 407 pounds and four pence for the month.
And then any earnings above 4,189 pounds,
in this instance up to 5,000 pounds,
will be subject to the above upper earnings limit of 2%.
So, for this triage of earnings,
your NI bill will be 16 pounds and 22 pence a month
giving a total NI bill of 423 pounds and 26 for the month.
And the concept is pretty much the same
for class one secondary national insurance,
that is the amount your limited company business
is responsible for paying across to HMRC on your behalf.
However, class one secondary national insurance starts
from a slightly lower threshold
of 737 pounds per month of earnings
but is charged at a higher rate of 13.8%,
and unlike class one primary national insurance,
there is no upper earnings limit leading to a reduced rate.
It pretty much carries on indefinitely.
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With regards to your class one primary national insurance,
well, the simple fact is there's nothing you can really do
to reduce or mitigate it, other than pay yourself less.
There are no allowances at present either, to help you
and it is administered through the PAYE,
that is pay as you earn system.
However, your class one secondary national insurance
can be mitigated by ensuring you claim the annual employment
allowance on behalf of your limited company.
You can make a claim for this employment allowance,
so long as you don't meet the who cannot claim criteria,
clearly displayed on screen.
Now these are:
If you are in business doing half your work
in the public sector.
So for example, if you are doing work for the NHS,
a public body and over 50% of your revenue comes from them.
Here's the most prominent one, that you are
a one person director/employee limited company business.
Now this is where, perhaps, quite a few of you
will fall over, particularly you contractors
and freelancers out there
who are sole directors/shareholders.
And if you are working on an inside IR35 contract,
then the earnings from that particular contract
is excluded from claiming the employment allowance,
should you be paid into your limited company.
If you are eligible to claim the employment allowance,
then make a note of this magic number,
37,830 pounds per annum.
So in the current tax year,
all it takes is for your limited company
to have a total gross wage bill of 37,830 per annum
to generate a class one secondary national insurance
liability or 4,000 pounds a year.
And remember, the employment allowance is available
for up to 4,000 pounds per year.
And if you are eligible, this 4,000 pound liability
is offset against the allowance,
meaning you don't pay anything at all.
Of course, if your class one secondary national insurance
liability exceeded 4,000 pounds per year,
you would still need to pay any amounts above this,
even if you received the employment allowance.
How to claim the employment allowance is quite simple.
If you have the services of a bookkeeper payroll assistant
or accountant, then they should claim the allowance for you.
If you have a piece of accounting or payroll software,
then speak to your provider or look up their instructions.
It's quite often as straightforward
as ticking the right boxes.
However, be careful as if you do make a mistake,
rectifying matters with HMRC can be very time-consuming
and very painful, indeed.
I hope this video has helped you understand
national insurance and how you,
as a limited company director/shareholder,
can reduce your class one secondary national insurance bill
and taken you one step closer to knowing your numbers.
As always, let me know in the comments,
your thoughts on today's video,
or if there are any topics you'd like us
to cover in the future.
Finally, be sure to like and subscribe
as this really does help us to get our content out there.
This is Tony Dhanjal for the Accounting & Tax Academy.
Thanks for tuning in.
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