This year sees Easter, a festival celebrating birth and renewal, coinciding with the arrival of new National Insurance thresholds. So has the Easter bunny brought good news for business owners and the self-employed?
The new 2020/21 tax year begins on April 6, 2021, and with it comes new rates for National Insurance which affects employees, employers and self-employed workers.
This is particularly important to self-employed workers whose contributions will depend on their earnings and business profits. Where necessary, they may need to make voluntary contributions to ensure they are entitled to statutory benefits such as the state pension.
Joanne outlines the rates for 2021-22 below…
Employees start paying primary Class 1 National Insurance contributions once their earnings reach the primary threshold of £184 per week (£797 per month; £9,568 a year).
Any employees whose income is between the lower earnings limit of £120 and £183 per week, will fall into the zero rate category. This means they will classed as having paid their National Insurance contributions, even though they pay nothing.
The reason for classing the lowest paid workers as contributors is so that they still qualify for the state pension and benefits.
National Insurance contributions due on earnings which fall between the primary threshold (£184 per week) and the upper earnings limit are calculated at the main primary rate of 12%.
For the 2021/22 tax year, the upper earnings limit is now £967 per week (£4,189 per month; £50,270 per year). Contributions on earnings above this limit are taken at an additional 2% rate.
Employers must pay Class 1 National Insurance contributions, also known as secondary contributions, at a rate of 13.8% on all earnings above a certain rate. These are the thresholds for employers:
- Secondary threshold: this is the main threshold for employers and applies to employees aged 21 and over (and who are not apprentices under the age of 25). For 2021/22 the threshold is £170 per week (£737 per month; £8,840 per year).
- Higher secondary threshold: this affects employees under 21 and apprentices under 25. For 2021/22 this is £967 per week (£4,189 per month; £50,270 per year) which matches the upper earnings limit for employees.
These employer payments also contribute to the employee’s entitlement to statutory payments.
Employers also pay Class 1A National Insurance contributions on benefits in kind (such as company cars, phones etc) and taxable termination payments. When there is a PAYE Settlement Agreement, employers must pay Class 1B contributions at 13.8%.
Self-employed workers fall under Class 2 and Class 4 contributions, depending on their business earnings and profits. The thresholds are as follows:
- Class 2: contributions payable at £3.05 per week for 2021/22 on earnings above the small profits threshold of £6,515. For earnings below this threshold, voluntary Class 2 contributions can be made to maintain the worker’s statutory benefits.
- Class 4: contributions payable at 9% on profits between a lower profits limit, (£9,568) and an upper profits limit (£50,270). Earnings above this attract an additional 2% rate.
As well as the thresholds mentioned above, you can choose to make voluntary Class 3 contributions to maintain your National Insurance contributions record. These are payable at £15.40 per week. If possible, we advise you to make the lower Class 2 voluntary contributions..
“The issue of National Insurance contributions can seem complicated, especially to new self-employed workers and employers hiring staff for the first time,” adds Joanne. “Our friendly, finance professionals are here to help guide you through what you need to do.”