National insurance contributions for business owners in the UK is an important subject, regardless of whether you are self-employed, a sole trader, or a company director. Unfortunately, Philip Hammond, Chancellor in Theresa May’s cabinet, has put an obstacle in the path of entrepreneurs by increasing the amount of social security contributions. Who will be the worst affected?
I am self-employed
There are several classes in which NICs (National Insurance Contributions) are paid. National Insurance contributions for the self-employed in the UK are paid in Class 2 and Class 4, depending on income. At the moment, everyone registered as self-employed is required to pay 9% NIC on any amount in excess of £8,060. For employees, the current rate is 12% on any amount in excess of £8,060. Special rules apply to persons engaged in specific types of work (e.g. examiners or persons doing business related to land or property). The amount of the contribution depends on the total income of all the work you have performed. HMRC will tell you how much you should pay after you complete the Self-Assessment tax return.
I am a company director
Directors of limited companies may pay themselves a salary in two ways: as salary or dividends. If the director of a company wants to pay himself a higher salary than £8,060, he will pay 12% NIC, because he is earning the money as an employee. However, he may decide to pay his remuneration at an amount not exceeding the NIC threshold, and then pay the extra money in the form of tax-free dividends. Because the income tax threshold (Personal Allowance) in the UK is £11,000 pounds, the director does not pay either NIC or income tax.
I am a sole trader
The situation is slightly different for sole traders. The total profit in their business is documented in an annual declaration and taxed in the same way as a normal employee salary. Sole Traders have a NIC threshold of £8,060 pounds and an income tax threshold of £11,000 pounds. They have a tax rate at 20% at the basic level, 40% at the higher rate tax threshold and 45% at the highest tax threshold.
In the first budget for 2017 it was announced that national insurance contributions for business owners in the UK will increase from 9 to 11% in 2018. These changes will not affect the company directors, if they decide to pay higher than £8,060 pounds, because even so the money will be taxed at 12% (payment as an employee), and most of them will choose additional tax-free dividends, not salaries. Unfortunately, in conjunction with other changes in the tax deductions for business owners, these changes are not beneficial to the self-employed and will strongly affect sole traders.
How can small businesses deal with this?
Every person who is over 16 years of age, has not yet reached retirement age, and is working in the United Kingdom, is obliged to pay national insurance contributions. Because of this they are entitled to free use of health care and have the right to a state pension. How can small businesses cope with the increase in contributions? Wisely managing tax affairs, effective accounting, knowledge of regulations, and running a well-organised enterprise – if you manage to combine these, running a business will not only be fruitful and satisfying, but will also minimise expenses. It’s a fact that is confirmed by all our customers!