In case you thought otherwise, let us assure you that national insurance is in reality just another tax like all the others. Whatever the history, which is embedded in the name, it’s no longer a contributory insurance scheme which the government save up and pay back to you with interest when you retire, or claim other benefits.
The government spends the NI contributions it receives as it receives them, or even, arguably, long before. And the employer’s national insurance contribution doesn’t even give an entitlement to benefits. In any other country it would be given the name it deserves, which is a payroll tax.
One legacy of this very equivocal history of the national insurance levy, though, is the fact that in some senses, and some circumstances, it could be described as being pretty much a voluntary levy. As you will see from the ten neat NI saving ideas that follow, rearranging the way you do things can reduce or completely eliminate this particular “tax”.
1. Spreading the Income
National insurance has thresholds like income tax does, and if you’re in a position to spread your income between family members, you can use their nil thresholds to reduce the amount of NI the income would have otherwise borne. This is obviously easiest for those in some kind of self employed business, but sometimes given a connection between employer and employee, or a particularly friendly employer, it may be possible to do the same with salaries and wages.
2. Dividends
Probably the most popular method of NI avoidance of all, taking income out of a company as dividends rather than director’s remuneration, despite mutterings and rumblings from time to time from the government, is still a perfectly valid and effective way to turn heavily NICable income into non NICable income. Of recent years there’s been an additional income tax which takes away some of the net benefit of this, but it’s still normally going to be a lot cheaper to take income from your company as dividends than as remuneration. If you’re working for someone else, and haven’t got a company, you may still be able to make use of this by trading through a personal service company instead of receiving your income through the payroll. More on personal service companies in a minute.
3. Interest
Interest is another of those methods of taking income out of the company in a way that doesn’t attract a national insurance liability. If you have made any kind of loan to the business which employs you, consider this as an alternative to both remuneration and dividends. It beats dividends, in fact, as well as remuneration, because there’s no equivalent of the supplementary “dividend tax”. But the payer, if it’s a company, has to deduct basic rate income tax at source, which can be regarded something of a hassle.
4. Rent
If your employer (perhaps your own company which “employs” you as director) occupies any premises that you own personally, rent is an excellent NI free method of income extraction. It beats remuneration, dividends, and interest, because not only is there no equivalent to the “dividend tax”, but the paying company doesn’t have to deduct tax as source, and therefore that bit of administration is avoided.
5. Capital Payments
Still on the ascending scale of brilliant ways of extracting money from a company instead of paying remuneration, if you can receive payments from the company in capital form, then not only do you not have any national insurance liability, but you don’t even pay income tax. The simplest example of a capital payment is when you receive a repayment of your director’s loan balance, but there are other situations, for example where you decide to sell an asset (even an intangible asset like software rights) to the company, and the company pays you for the acquisition of that asset. (Where you do make a disposal, of course, you have look at the capital gains tax implications, but these tend to be friendlier than the income tax implications of taking the same amount as income; and there’s no question of national insurance on capital gains.)
6. Benefits in Kind
These used to be much more of an NI bonanza than they are now, but they still have their uses. Benefits in kind provided to employees now attract a contribution from the employer akin to the “employer’s national insurance” 13.8% levy. But benefits in kind are still exempt from the employee’s contribution, which can be at a rate of as much as 12%. So you could save a few thousand easily by taking your pay in cases of wine!
7. Going Freelance
For historical reasons, the rates of NI for the self employed are very much less than those applying to employees. The main difference is that there’s no equivalent, in the self employed sphere, of the 13.8% employer’s national insurance charge, which we’ve compared to a payroll tax above. So if you pay someone as a freelance rather than as an employee, then you the “employer” of that person will save the 13.8% addition to the cost of using that person’s services. But is it as simple as that? Needless to say, no! In order to be confident that you’ve “really” saved the employer’s NI bill, the person needs to be what you might call really self employed, rather than employee dressed up as such. What this means is that they need to be sufficiently independent of the payer in the way they do their job, and issues such as the amount of control exercised over how, when and where they do their work; whether they are paid on piecework or by the hour; whether they take financial risks; whether they can send substitutes; and a host of other factors, determine whether the payer is justified in taking them off the payroll (or not putting them on). The penalty for getting this particular complex issue of judgment wrong is the risk of an assessment of arrears of PAYE and NI deductions going back a matter of years, together with interest and penalties. That’s the bad news, of course. But the good news is that modern working practices very much tend to favour the independence of individuals working for someone else, as compared with the factors which applied when these frankly antiquated rules were first devised.
8. Personal Service Companies
The “employer” also saves the employer’s national insurance levy if, instead of paying the individual through the payroll, it pays the personal service company of that individual. Again, things had been made a little bit more complicated than that, recently, though. If the “employer” is in the public sector, or a large or medium sized private sector organisation, similar problems can arise with paying someone’s PSC as we just described with paying someone as self employed when they are “really” employed. Thanks to “IR35”, where a PSC is placed between an individual who would otherwise have been an employee and a person who would otherwise have been their employer, the same PAYE and NI results flow as if the person had been on the payroll. The situation is different where the payer is a “small” company (which is a highly relative term). In that instance, IR35 still applies, but the person who carries the can is the PSC and not the payer. If in doubt, get someone to look at the terms of work, and give an opinion on which side of this crucial line the working relationship lies.
9. Membership of an LLP
Until comparatively recently, HMRC’s very generous view was that anyone who was an LLP member should be treated as self employed by definition, and therefore eligible for the much lower national insurance rates. That all changed from 6 April 2014, when the government decided that people were saving too much NI by putting junior staff members in as LLP partners. So now an LLP member needs to meet various conditions for their income to be put down as self employed. Quite apart from the fact that the source of the income has to be in an LLP rather than a company, the individual also needs to meet one of the following criteria:
They need to exert a significant influence, under the rules of the LLP, over the way the LLP is run; or
At least 20% of their expected annual income needs to be variable dependent on the profits of the LLP; or
They have to have a substantial amount of capital (measured by reference to their expected annual income) invested in the LLP.
These are obviously fairly stringent conditions, but there are quite a lot of real life situations where they can be met by people who would otherwise have been paying through the nose in employee and employer national insurance.
10. Share Option Schemes
The main Revenue approved share option scheme these days is EMI (the Enterprise Management Incentive). Under this scheme, individuals can, subject to certain targets being met, acquire shares in their employer company at an undervalue, without that undervalue suffering income tax. Just as income tax is saved by means of putting in place one of these schemes, so is the national insurance that would have otherwise been payable.
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