EMTACS Accounting --- About N.I.

EMTACS
Entertainers and Musicians Taxation & Accountancy Services
69 Loughborough Road, West Bridgford, Nottingham, NG2 7LA
Phone 0115-981-5001 Fax 0115-981-5005

National Insurance for Employees is nice and simple. Once your earnings go above a certain level (£97 per week in 2006/07) you pay 11p for every £1 above. There is a ceiling to this - around £34,000 per annum and once you reach that level, all you have to pay is a so-called 1% NI Surcharge. There's no ceiling to that.

National Insurance for "normal" Self-employed people is also fairly simple. Self-employed people pay two kinds of National Insurance. The first is called Class 2 NI (sometimes referred to as weekly stamps, even though it's most often paid by monthly direct debit). This is a flat fee, which is £2.10 a week for the current year, although it was higher in previous years. This flat rate buys one the basic benefits of National Insurance - Incapacity Benefits, old age Pension, but not Jobseekers Allowance. Of course not all Self-employed peoples earn the same amount of money, so...

…there is a second kind of Self-Employed NI, called Class 4 NI, which is a percentage of your profits above a certain level. For 2006/07, this is 8% of your profits above £5,035. Again there is a ceiling, currently £34,000 or so, above which you have no further NI to pay.

As you will see from this, National Insurance is cheaper for somebody who is Self-employed than for someone earning the same amount as an Employee.

INCOME

EMPLOYMENT

SELF-EMPLOYMENT

2006/07

6,000

9,000

12,000

20,000

Employee NI

106.15

436.15

766.15

1646.15

Class 2 NI	Class 4 NI	Total
£	£	£
109.20	77.20	186.40
109.20	317.20	426.40
109.20	557.20	666.40
109.20	1197.20	1306.40

A Bit of Both

Not everybody fits into these neat boxes of just Employment or normal Self-Employment. Someone who has a Self-employed income of a few thousand pounds, as well as PAYE jobs, sometimes has to pay both kinds of National Insurance and there isn't anything unfair in this. Somebody who makes £10,000 a year as a civil servant and £8,000 as a night club singer will have to pay Employee NI on the day job and then Self-employed NI on the extra profits. There is nothing unfair in this - it's just that all the income has some NI to pay on it one way or another.

Small Earnings

If the Self-Employed profits go below a certain level, called the Small Earnings Threshold, then the Self-Employed National Insurance no longer has to be paid. The limit for 2006/07 is £4,700 but the NI people do have to be informed and then you claim what's called Small Earnings Exception. You do this in advance and get a certificate which lasts for a couple of years and at the end of that time the NI people get back to you to check that your expectations of low profits proved to be correct. If you were wrong you do have to hand over the NI you've failed to pay but at £2.10 per week, this amount is not increasing very quickly.

This situation is most commonly useful for people who have a reasonable amount of PAYE income and who are already paying Employee National Insurance. The Contributions made at the day job will therefore entitle you to all the Benefits (Jobseeker Allowance, Pensions, etc).

Even if you aren't paying Employee National Insurance, it's still possible to ask for Small Earnings Exception but it does mean that you are failing to contribute to the NI scheme for that particular year. That can have consequences if you need to claim Benefits and if it continues for more than the odd year, it could have an impact on your ultimate State Pension when you reach retirement age. Although there is often a sense of trying to avoid having to pay any bill from the government, it's one of those instances where it's not necessarily in your own long term interests.

But what if I have NI taken from my self-employed income?