how is national insurance calculated ?

[georgers]

Hi have been given some advice but it seems strange to me so I would like to know how national insurance in calculated on weekly or yearly earnings?

lets assume someone earns £110 per week for 52 weeks then i think no NI is due
what if someone earns £100 per week for 51 weeks and then earns £620 for one week, do they pay NI even tho the earnings over the year are exactly the same?

if they do have to pay NI, is there a way of avoiding this legally? perhaps if it were called a bonus or something else?
does it matter if the employee is PAYE or NOT PAYE?

all advice great appreciated

[Matt@callunatax]

Hi,

National Insurance is calculated by reference to an earnings period. Normally this is in line with a persons regular pay interval (eg weekly, monthly). However, there are special rules for Directors.

Each earnings period is taken in isolation so your example is correct you could be paid just under the NI limit for 51 weeks of the year and not pay NI and over for 1 week of the year and just pay NI for that week.

However, it is generally accepted that an regular employee cannot dictate their pay levels. In the situation where you can control your own pay levels ie you are the Director of your own company then you come under special rules where your earnings period is taken as the year regardless of the frequency of your payments. This then avoids any manipulation of salary to reduce the amount of NI paid.

There is no way of avoiding payment of NI by simply renaming the payment, the actual nature of the payment is looked, although there are ways of structuring remuneration to minimise a persons liability.

If a person is not subject to PAYE, then they are not an employee and are likely to be self employed. Those who are self employed pay Class 2 and Class 4 NI which are dealt with under a separate set of rules and are not related to earnings periods in the same way as Class 1 NIC which employees pay.

Hope that helps, feel free to contact me below if you need any more help.

Regards

[georgers]

thanks for your help, the position is quite simple this:
i work for a company as a director along with another family member, we both receive payslips and earn £100 per week.
i note that the threshold for NI is £110 per week so we thought about paying ourselves an extra £500 to take advantage of this. we can call it a bonus or wage or something else. so would this still incur NI?
thanks

[georgers]

just to clarify my previous post, we are both directors

[Matt@callunatax]

As Directors you will automatically be on an NI earnings period of a year, so your weekly earnings are not relevant in this scenario. I note that you don't seem to be utilising all of your personal allowance with this salary.

Any bonus or wage would still incur NI.

Have you thought about having a Directors remuneration review to ensure you are maximising your tax efficiency? Having worked in this area for a number of years, it is an area I specialise in. I am offering a free initial review to establish if there are any savings and if they are my fee would be a proportion of the saving in the first year, so effectively it isn't costing you anything.

Contact me through my website if you're interested.

Regards

Matt

[georgers]

i will give that some thought - thanks for your help so far