National insurance for start-ups

Whether you’re a work at home parent, or have combined forces with a partner to start your dream job, this article is a must read to ensure you stay on the right side of the law when it comes to national insurance.

When starting a new business, it’s important to have a good understanding of your tax obligations to avoid fines and debt. But exactly how and what you pay depends on the company that you are forming.

In addition to income tax, all employees and employers must pay national insurance. These are payments that are made in order to gain access to state benefits such as a state pension and access to the National Health Service. If you are over the age of 16 and earn more than £157 a week, you are liable to pay National Insurance directly out of your pay cheque.

However, most startups need to calculate and self-declare your national insurance contribution depending on how the business can be classified.

Partnership

You and your partner must individually declare and pay Class 2 fees of £2.85 per week if your shared profits exceed £6,025 per annum, or Class 4 fees if your profits exceed £8,164. These are at a rate of 9% up to £45,000 and 2% over that. You will need to register with HMRC as a partner and pay your contribution twice a year; once in January and once in July.

Self-employed/ sole trader

Likewise, if you are self-employed you don’t need to pay national insurance on earnings made through self-employment until the business has made a profit of more than £6,025. After this, you are liable for Class 2 fees of £2.85 up to profits of £8,164, and Class 4 fees if your profits are greater than £8,164 per annum. Class 2 fees are all paid at one time but Class 4 contribution is paid twice a year, with one payment occurring in January and another in July. To pay you need to register as self-employed with the HMRC and self-assess your earnings.

Limited company

As a limited company, national insurance payments can get a little more complicated. All people running the business are classified as employees and draw a wage from the company. In these cases, your employees pay Class 1 national insurance. These fees amount to 12% of earnings over £127 up to £866 per week, and 2% for earnings over. But, as the director of the company, your contributions are calculated differently. Rather than using your weekly earnings, your fees are calculated from your annual earnings but still deducted from your pay. Further in addition to the national insurance you pay as a director, there is another flat rate employers National Insurance liability of 13.8%. Both employer and employee national insurance is paid to HMRC via the PAYE process (pay as your earn) with each pay check. If you do not already know what this is, more can be read about the PAYE payroll process on informi.co.uk.

In setting up your start-up it may be worth considering what steps can be taken to minimise the amount of national insurance that you will have to pay. If you have employees, you can do this through benefits such as vouchers or other non-cash bonuses as incentives that aren’t related to increasing pay. It is possible, for example, to have a ‘salary sacrifice scheme’ where pay directly into contributed into an employee’s pensions without being and is thus not liable for national insurance tax.

As a business owner, you may also be able to avoid paying contributions by taking profits as dividends rather than salary. Since April 2016, no tax is payable on the first £5,000 of dividends a director receives a year. After that you can expect to pay tax of 7.5% for low tax bracket, 32.5% for higher rate payers and 38.1% for the additional rate. However, from April this year the first untaxable dividend allotment will be reduced by £2,000.

Voluntary national insurance

During the first year of two of setting up your startup it is likely that your businesses earnings will not exceed the minimum amount of profit (£6,025) you need to make before it’s necessary to pay national insurance. If you have other employment during this period in which you earn more than £127 per week and thus pay your national insurance contribution, then you do not need to consider paying voluntary national insurance. However, if you do not have an income while you’re setting up your company you may consider paying voluntary national insurance to ensure that you have paid enough national insurance to be entitled to a full state pension when you retire. If you are unsure about whether you have paid enough national insurance you can check your record at https://www.gov.uk/check-national-insurance-record.