Insuring the future with a look at the present (no gifts from the chancellor in this one)

how to link personal tax a/c to self assessment

Spring has sprung (OK, it is snowing as I write this but forgive me), the daffs are out, the sap is rising, what a time to be alive!

And what better time than to check out the latest episode of our favorite soap, “Downing Street”, starring Dishy Rishi and his magic red box of delights.

In this week’s episode, he’s got that special spring in his step too and who can blame him…it is time to reveal the latest changes to National Insurance (NI)…

Cue drums or brass band intro, depending on your preference of north vs south soaps. Scene opens with Dishy (sorry, Rishi – must be professional, all very serious here) stood at his little table thingy in Downing Street.

Flashes go off from the adoring/baying press, delete as applicable.

One intrepid hack ventures from the media scrum.

“What news from the spring statement Dishy?”

“Yeah, what’s all this about a fall in income tax?”

Dishy, urging the pack to settle;

“Ah, be calm my friends. We will come to that in good time. Probably. Maybe. A bit. However, remember, that when I give with this hand, I snatcheth away with this.” Much shuffling of papers ensues before a gentle cough signals the REALLY EXCITING news is about to be announced…

Presenter (Louise) takes over, Dishy in background, droning on…

So where are we at the moment for the 2021/2022 year?

Your employer will deduct 12% NI if your gross earnings are over £9568 (then goes to 2% above £50270). They also pay national insurance on your earnings over £9568 at a rate of 13.8%.

A self-employed person gets to pay Class 2 National insurance at a rate of £3.05 per week, and also pay class 4 NI at 9% if profits are over £9568 (then it goes to 2% above £50270).

In the 2021 the chancellor introduced a Social Care Levy of 1.25% of gross earnings & profits, taken from the employee, employer and self employed person. However, for the 2022/2023 tax year, to make things “SIMPLE”, the 1.25 percentage points would be added onto the national insurance paid.
Errr what?

Basically, the employee would pay 13.25% NI (3.25% if over £50270), Employer pays 15.05% on gross salary and self-employed pay 10.25% class 4 NI on profits until £50270 then at 3.25%.

Psst (stage instruction from wings).

If you earn money from dividends, you normally pay 7.5% on dividends over £2000 in a tax year, but for 2022/2023, that rate is now 8.75%. The rate for higher and additional tax payers also have an additional 1.25 percentage points.

Righto so what’s changed?

The social levy is still being introduced, so the rates of NI will still apply, but the thresholds are changing from 6 th July 2022.

Effect on the employee:

For salary in April-June 2022, anything above £823, will have NI deducted of 13.25%. For salary from July onwards, the monthly threshold changes to £1048 before any NI is deducted.

Effect on the Self-employed:

Although the threshold to pay class 4 NI increases to £12570 in the year, it only comes in from July 2022. That means when the self-assessment tax return is done from April 2023, the class 4 threshold will be £11908 before you pay any NI.

This is because you have 3 months at the lower threshold, then 9 months at the higher threshold. The system assumes an even split of earnings throughout the year and will not do a 3/9 month split of profits if income is seasonal. From 2023/2024, the full threshold will apply.

But more on 2023/2024 another time – oooooh I bet you can’t wait!

The effect of class 2 NI is the “interesting” bit. If you are into this lark. Profits between £6725 up to £11908 will not attract any class 2 amount to be paid, but full credit will be given for NI credit in relation to benefits and state pension. Taxable income above the amount will be charged at £3.15 a week so totalling £163.80 for the year.

The self employed with profits below £6725 can opt to pay the class 2 NI amount of £3.15 per week for the year to keep the benefits or not. It seems crazy that you have to pay £3.15pw if your profits are below £6725, but if you increase profits to just above the £6725, you will have nothing to pay as you get deemed NI. Let your accountant work this one out as to whether it is beneficial for your profits to go above the £6725 limit or not as it may inpact if you have to pay income tax should you have other income.

Directors of your own limited company

Well you are a special breed. you can pay yourselves £758.33 a month and not pay any employees or employers NI. Woo Hoo. This is the maximum of £9100 a year before employers NI kicks in, so if you think you can increae it to £1047.50 from July – think again. You won’t be paying employees NI as below the threshold, but that sneaky employers NI of 15.05% kicks in at £9100, so if you are set up as a director on the payroll, you will be paying NI for the last few months of the year.

If you need any further information, please contact us

About the Author