National Insurance Planning

Class 1

A two-part payment by both the employee and employer, the contributions are based on a percentage of earnings including most benefits. The employees’ contributions are deducted from wages and salaries together with PAYE deductions, but are not allowable against income tax. The employer’s contribution is eligible for tax relief.

The principal difference between ‘earnings’ for national insurance contribution purposes and ‘pay’ for income tax purposes is that for NI there is no deduction in respect of contributions to a pension scheme. Earnings include:

• commissions
• salaries
• bonuses
• certain benefits in kind

The following items are specifically excluded:

• reimbursed business expenses actually incurred by the employee, and for which a proper receipt is available
• redundancy payments
• use of employer-owned or leased assets, e.g. houses
• medical insurance (e.g. BUPA) arranged by the employer

Class 1 national insurance contributions are payable for 2016-17 as follows (not contracted out rates):

Payment Period	Weekly £	Monthly £	Yearly £
Employees
Nil on first	112	486	5,824
0%* on next	43	186	2,236
12% on next	660	2,860	34,320
2% over	827	3,583	43,000
Employers
Nil on first	156	676	8,112
13.8% on balance	(no upper limit)

*Earnings between the lower earnings limit and the earnings threshold protect an entitlement to basic state pension and other contributory benefits without incurring any actual national insurance liability. The individual's RTI record will be automatically credited with basic NI credits for the relevant period.

Class 1A

Special rules, and a special class of NICs, apply to benefits in kind. Class 1A contributions are payable by employers only. 

The charge is worked out on an annual basis using the cash equivalent of the benefit (as for income tax). The amount of Class 1A contributions is calculated by using information recorded on Forms P11D and applying the Class 1 employers’ contribution rate for the relevant year (13.8% for 2016-17).

Once the amount of Class 1A contributions has been calculated it must be declared using form P11D(b). This form, and the related payment, must be received by HM Revenue & Customs by 19 July following the end of the tax year to which it relates. In most cases special Class 1A payslips will be sent to relevant employers in the first week of April.

Dividends instead of salary

For limited companies you should consider paying dividends rather than salary. Where directors are in receipt of a salary from a company, the NIC cost may be such that part of the payment could be more cost effectively made as a dividend. There are special rules for some companies providing personal services.

The decision on whether to pay a dividend or not is complex because the payment of a dividend may influence the value of the company’s shares and therefore increase the liability to capital gains tax and inheritance tax. There is also a maximum amount that may be paid, based on the company’s results.

Further strategies for minimising national insurance

Clearly there is more need than ever to mitigate NICs. Strategies are limited, but we can help you with ideas for saving employer and/or employee NICs including:

• increasing the amount the employer contracts to contribute to company pension schemes
• share incentive plans (shares bought out of pre-tax and pre-NIC income)
• salary sacrifice arrangements in respect of tax-free benefits in kind, such as the provision of childcare
• giving employees other non-cash benefits in kind may reduce their NICs

Actions unlikely to save NICs:

• Round sum allowances - any profit element will attract NIC
• Employees contributions to pension schemes

Please call us if you would like further help or information on this subject.