The UK economy may be bouncing back from the pandemic, but the costs of the furlough scheme, business loans and supporting the NHS has meant a painful financial hangover.
The £400 billion Covid bill itself more than 17% of GDP has been added to the ever growing cost of social care.
Boris Johnson confirmed long-awaited proposals to raise National Insurance contributions by 1.25%.
At Continuum we are looking at ways to soften the blow.
Who will pay – and how much?
Employees, the self-employed, and employers will have to pay the increased NI contributions. This includes those in work who are over the state pension age, who don’t currently pay NI. Those earning less than a threshold of £9,568 will not pay the levy.
A typical basic-rate taxpayer earning £24,100 will contribute around £180 more in NI in 2022-23. Someone on a £50,000 salary could see their annual NI contributions rise by more than £500, while a typical higher-rate taxpayer earning £67,100 will contribute £715 more.
What can you do about it?
With payments being exacted even if you are past retirement age, you cannot escape NI contributions or increases. The good news is that there could be some ways to reduce the cost to you.
Boost your pension
Rather than pay increased National insurance, you may prefer to pay more into your pension.
Paying more of your salary into your pension fund, via a salary sacrifice arrangement (for those employees whose companies operate such arrangements), is extremely tax-efficient, as the cash that goes into your pension is no longer liable to income tax or National Insurance. So you can save 20% income tax, and NI, at 13.25% (under the proposed new rate).If your employer matches your contribution, you benefit all the more.
Someone earning £30,000 per year who arranges a salary sacrifice to cut their annual salary to £28,500 would pay £17.25 less in National Insurance each month.
Watch where the money is coming from
Unlike income tax which is calculated on total income, NI is based on weekly or monthly earnings. So if you have two or more jobs, or do some freelance work you can save money by earning less than £9,568 in your second job.
Self-employed people pay a different rate of NI, known as class 2, currently £3.05 per week if income exceeds £6,515 a year. They also pay a class 4 contribution at 9% up to £50,270, and 2% after that. However, if you are employed but do some freelance work, your liability is capped. Make the adjustment in your self-assessment return to ensure you do not overpay.
If you run a small business and can decide how you are paid, you could consider taking dividends rather than a salary. Dividends are not liable for NIC and also attract less income tax than earnings.
The amount you need to earn to receive a credit towards the state pension is £6,136 a year. If you earn between this amount and £9,568 you pay no NI but still get credits on your state pension record, which means you are building your state pension entitlement – you need 35 years credits to get the full amount.
Boost your investment income
NI doesn’t apply to money made on stock market investments and rental income, although they can be subject to capital gains tax. However, the dividend tax rate has also been increased by 1.25%.
You don’t have to pay tax on the first £2,000 each year. Beyond this allowance, dividends will now be taxed at a rate of 8.75% for basic rate taxpayers, or 33.75% for higher rate taxpayers.
Rental income does not incur NI charges either. Under rent a room relief the first £7,500 income is entirely tax free and should not even affect any capital gains tax position on the eventual sale. Renting a complete home will mean tax, but no NI.
Get some practical help
At Continuum we can help you look at your overall financial position to keep your NI obligation to a minimum.
What solution is right for you?
These are only some of the solutions to NI increases, and the solution that is right for you will depend on your overall financial circumstances.
At Continuum we can work with you on an individual basis to develop a wealth management scheme which could help you build your wealth, make better use of your resources and reduce the share the taxman wants to take.
The information contained in this article is based on the opinion of Continuum and our understanding of proposed changes by HM Government and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
The value of an investment and income from it can go down as well as up.