- British PM Boris Johnson has announced hike in National Insurance tax by 1.2% from next year.
- The National Insurance is a tax that depends on employment status and earnings.
- Some of the ways to slash your National Insurance Bill are to use salary sacrifice scheme and cycle-to-work scheme.
British Prime Minister Boris Johnson has announced hike in National Insurance tax by 1.2% from next financial year to pay for health and social care reforms. The rise in tax rate is designed to raise £36 billion (US $49.86 billion) over the next three years, which will affect millions of British citizens as they have to pay hundreds of pounds extra each year in National Insurance payments. This is a breach of the 2019 Tory manifesto.
If someone is earning £30,000 per year, they have to pay £255 extra every year from the new tax year. The Prime Minister also said that dividend rates are to go up by the same rate.
The decision led to widespread criticism as the conservative party had promised in its 2019 manifesto, that it will not increase the rate of income tax, National Insurance or VAT.
What is National Insurance?
National Insurance is a tax on one’s month salary and self-employed profits in a bid to qualify for some earmarked benefits and State Pension. Most people pay National Insurance contributions as part of their Self Assessment tax bill.
The National Insurance contribution depends on the employment status and how much a person earns.
Who pays National Insurance?
The National Insurance classes depends on your salary and job status.
Class 1 National Insurance has to be paid if you are an employee earning above £184 a week, under State Pension, the employer will automatically deduct your contribution.
Class 2 National Insurance has to be paid if you are self-employed and earning less than £6,515 you may choose to pay voluntary contributions to avoid gaps in your National Insurance Contributions.
A Class 3 National Insurance payer may pay Voluntary Contributions to fill or avoid gaps in National Insurance record.
A Class 4 NI is to be given if you are self-employed.
A Class 1A or 1B National Insurance is paid by employers directly on their employee’s expenses or benefits.
You need a National Insurance number before you start contributing in your National Insurance.
A Class 1 National Insurance contribution contributed by an employee is stopped when they reach the State Pension Age and if you are self employed you stop paying:
- Class 2 National Insurance contribution when you reach State Pension age.
- Class 4 National Insurance contribution from 6 April after you reach State Pension age.
Also read: What is The Triple Lock on Pension Saving?
What is National Insurance (NI) number?
National Insurance number is set by the department of work and pension to make sure your contributions and tax are recorded against your name only. It’s made up of letters and numbers that never changes. You can find your number on your salary slip, on your tax documents, pension papers, and others.
How you can slash your National Insurance Bill?
- Use a Salary Sacrifice Scheme
Contributing on your pension is a great way to cut on your tax. If your employer offers salary sacrifice scheme you may choose to reduce your pay and contribute the equivalent amount to your pension, which means you are boosting your income in retirement by lowering your current salary.
- Sacrifice some of your bonus
If your employer allow, contribute your bonus into your pension too. As bonus may push you over a higher-rate tax threshold or into paying the high income child benefit tax charge.
- Check out cycle-to-work and other schemes
You may also use other salary sacrifice schemes to cut on your tax. This includes cycle-to-work schemes, the purchase of employer supported childcare and ultra-low emissions cars.
However if the employer directly funds childcare, you can take advantages of National Insurance saving and the tax, but if you apply for tax-free childcare yourself the process works differently and you can’t take advantages of National Insurance saving.
Although a self-employed person pays lower rate of National Insurance but this should be not a reason to go for self-employed and if you are thinking make sure it works for you. As this is a huge lifestyle change and you have to take responsibility for all the things from finance to making it work.
- Check whether you are entitled to tax credits
If you are a disable worker, you look after children or you are on lower income slab you may claim for extra cash.
- Adjust your budget according to the new hike in National Insurance Rate
You need to design you budget according to how much extra will be deducted from you earning each month.
- Claim Tax relief
You may claim tax relief to make savings on your tax bills by taking advantages of various options available to you such as Marriage allowance, Council tax refund and if you are working from home.
You may claim for marriage allowance if you or your partner earns less than £12,570, you may save £252 a year. You may claim for Council tax refund, if you are a full-time student, you may claim for 100% discount and if you are living on your own you qualify for a 25% discount, and if you are working from home you may claim tax relief for your job expenses up to £125 a year.
- Make sure your tax code is correct
According to the financial management software provider, Intuit Quickbooks, a third of UK worker do not check their monthly payslips. Checking payslip is important as it gives a clearer picture of your finances and make sure you are not on the wrong tax code and paying high tax that you owe.