Additionally, pensions including the state pension are exempt from NICs even where an individual receives a company or personal pension below state pension age but they are liable to income tax. In then Chancellor Philip Hammond tried to close the gap with an NI rise for the self-employed but performed a U-turn after facing criticism that this would amount to breaking a manifesto pledge. Those who defend a lower rate for the self-employed generally argue that it reflects a lower entitlement to state benefits for the self-employed, however this differential has reduced in recent years.
IFS look at the arguments on pages of this note. Announcing the Self-Employment Income Support Scheme in March , Rishi Sunak told MPs: "It is now much harder to justify the inconsistent contributions between people of different employment statuses. If we all want to benefit equally from state support, we must all pay in equally in future. Avoidance of employer NICs is one of the main drivers of misclassification of individuals as self-employed rather than employed i. Those affected miss out on employment rights such as national minimum wage, holiday pay and sick pay.
Any increase in the rate of employer NICs is likely to exacerbate this problem. The NIC system is sometimes manipulated by incorporating a business and trading through a company instead of being self-employed. As this threshold is below the personal allowance, it also incurs no income tax. Post corporation tax profits can then be withdrawn as dividend income for the sole shareholder the director , with no NICs payable.
Dividends are also liable for income tax at lower rates than other types of income and have their own tax-free allowance. Directors can also benefit by retaining profits within the company, paying capital gains tax upon selling it. People incorporate or not for a range of reasons, not just tax and NICs, and it would not be fair to categorise those who are influenced by tax as tax avoiders - they are effectively choosing one lot of statutory rules rather than another where the state has left them free to choose, without anything covert or artificial about it.
Generally no, as most loopholes have been closed over the years. We understand HMRC has been aware of such schemes operating in the temporary labour sector for some considerable time and while we are assured action is being taken there is very little public evidence to suggest that HMRC are concertedly tackling such schemes.
You might need to take advice. Look at the example Lucy to see how this works. You may also find our news piece Any questions? You can find more information about this on GOV. Salary sacrifice is not always a good idea for low earners, and there is one particularly unfavourable situation set out below to be aware of.
Also, you cannot participate in salary sacrifice schemes where your pay would be reduced below the national minimum or living wage. Nevertheless, salary sacrifice can benefit you in some circumstances. From 6 April there have been fewer opportunities to benefit from such an arrangement.
Below we explain how such arrangements work, what items may be included in any arrangements from 6 April and the changes that have been made to any arrangements that were already in place at 5 April Your employer may offer a salary sacrifice scheme that enables you to swap cash salary for non-cash benefits.
The position changed dramatically from 6 April From that date broadly any salary that is given up in exchange for benefits remains liable to tax and NIC as usual with no additional tax charge arising in connection with the benefit obtained in exchange , unless the cost to the employer is more than the salary given up: in that case the higher value is used. These used to be particularly efficient where the non-cash benefit was exempt from both tax and NIC. Even if the benefit provided in exchange for the cash salary was not exempt from tax, you normally saved NIC.
So you saved your Class 1 NIC liability. Any tax and NIC savings were maintained on all existing arrangements until at least 5 April This means that where you had an existing salary sacrifice arrangement, it may have ceased to be effective from 6 April unless it related to one of the approved benefits described above.
Arrangements relating to cars, accommodation and school fees remained protected until April You can read more about salary sacrifice schemes and the 6 April changes on GOV. Although salary sacrifice can sound attractive, if you are a low earner, the advantages are limited. If the salary sacrifice reduces your earnings below the lower earnings limit, this is even more dangerous. This means that you lose entitlement to contributory benefits and the state pension, if you do not receive NIC credits in another way.
This is a particular worry if your pre-sacrifice salary was between the lower earnings limit and the earnings threshold, where you would have been entitled to NIC credits. Look at the example Kerry to see how salary sacrifice works. Your employer may have to pay Class 1A NIC on the value of the taxable benefit, if the loan is a beneficial loan. If your employer writes off or waives the loan, they will deduct Class 1 NIC through the payroll based on the value of the benefit.
If you later repay a loan on which Class 1 NIC has been charged, then depending on how much you actually repay, the appropriate amount of Class 1 NIC charged should be repayable to you. An advance of pay, or a sub, is effectively a loan. It is not normally liable to Class 1 NIC at the date of the advance. Instead, your employer should collect the Class 1 NIC due on the advance at the time your pay would have normally been due — your usual pay day.
If you are off work as a result of an injury or accident, and your employer makes you a loan while you are waiting for the result of a claim for damages, the loan is treated as earnings for NIC purposes at the date of payment, unless you are obliged to repay it, whatever the outcome of the claim.
If the repayment is in the same year as you paid the NIC, an adjustment will be made in your next pay packet. If not, you will need to claim a refund. You normally pay Class 1 NIC, if you are an employee, from age 16 until you reach state pension age. You can work out your state pension age using the calculator on GOV. If you continue to work as an employee after you have reached state pension age, you do not have to pay Class 1 NIC. You only have to pay them on any earnings that were due to be paid to you before you reached state pension age.
You can find more information on NIC after state pension age in our pensioners section. If you have another job or are self-employed whilst working abroad then you may have to pay the equivalent of NIC in respect of that work in the country in which you are living.
Each week he pays Class 1 NIC of:. Emily works for a single employer, but her earnings fluctuate each month depending on how much overtime she works. Anya will also have to pay income tax on her earnings as a dental assistant. Her earnings are also below the lower earnings limit so she receives no credits to her NIC record. She pays no tax or Class 1 NIC. Her employer offers her some additional hours.
She is worried that she will have to pay Class 1 NIC and the additional work will not be worthwhile. This means that she is not entitled to contributory benefits and is not accruing qualifying years for state pension purposes unless she receives NIC credits for another reason.
This means she could gain entitlement to contributory benefits and potentially a qualifying year for state pension purposes, without having to physically pay out anything in terms of Class 1 NIC. She may have to pay income tax too, depending on her tax code. She pays for her child to attend nursery. The detailed treatment of employer National Insurance contributions is complicated. Most employers use payroll software or a payroll service to handle this.
Note that almost all businesses are now required to report PAYE information in real time. Reimbursed expenses are exempt from tax and NICs, providing they are costs that have actually been incurred by the employee, such as:. Where the expense or benefit is not exempt from NICs liability, or is provided under a salary sacrifice scheme, it is now usually reported via the monthly payroll.
Expenses not "ayrolled must be declared on a P11D. To simplify reporting, employers can use scale rates or flat rates to reimburse employees, instead of the actual costs incurred. Scale rates include:. They will ensure you understand the current legislation so that you always remain compliant. The changes to legislation in the last few years including Real-Time Information and Auto enrolment have made managing payroll much more difficult than it used to be.
Should you be struggling then speak to one of our payroll teams who can advise you on ad-hoc basis or provide you with ongoing support. Our payroll service has been designed with flexibility in mind. We are on hand to do as much, or as little payroll support as you need.
Details of our payroll service can be viewed here link to payroll. Whether you are employed, self-employed or an employer, we can assist you in all areas of national insurance compliance and advise on the scope of national insurance for specific transactions. Contact your local MFW office for a free initial consultation.
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