People tend to consider the rules concerning Income Tax and National Insurance to be the same. However, there are substantial differences, and these can have a dramatic effect on the amount payable. There are however anti-avoidance provisions to counter artificial arrangements.
Let us look at a few of the main differences. Firstly, Income Tax is calculated on a cumulative basis, whereas National Insurance is calculated on a “per payment” basis. This could affect someone earning a salary for instance, near to the lower or high National Insurance threshold. As an example, a weekly paid employee earns a total of £10,400 per annum will pay National Insurance on approximately £2,260. However, if that person is paid a basic wage of £50 per week for 3 weeks, and then £650 in week 4 including a bonus of £600, then that person will pay National Insurance on approximately £6,420, resulting in additional National Insurance of nearly £500. Meanwhile, Income Tax is unaffected by the pattern of payment.
In the example above the person with fluctuating pay is paying on the increased amount as his pay is fluctuating around the lower threshold. If, however, he is earning around the higher threshold than fluctuating payments can significantly reduce the National Insurance payable. The main anti-avoidance provision in this case relates only to directors who are made able to directly affect their remuneration. Many years ago it was normal for directors to pay themselves at a level just below the lower threshold for 51 weeks, and a large payment in week 52 substantially above the higher threshold. To avoid this, directors’ national insurance is now calculated on an annual, i.e. cumulative basis.
Secondly, Income Tax is calculated on the total of an individual during the year, whereas National Insurance is calculated on each source of income separately. That same individual earning £10,400 will pay national insurance on £2,260 if it is all earned from one employment. However, if he has two employments both of which pay £5,200 per annum then no National Insurance will be calculated on all earnings from those employments as if they were from the same employment. “The meaning of “associated” in this respect means more than simply being under the same ownership but is too complex to go into in the space available here.
For more information on our Company Tax work
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