By David Watkinson – WatkinsonBlack
The new tax year started on 5th April, so how much tax and national insurance will we be paying for the next 12 months?
The thresholds at which we start to pay both tax and national insurance have both now been aligned. Whilst the rates of tax are the same for everyone, the rate at which national insurance is paid depends on the source of income. Therefore, the total deductions in England and Wales (the rates are different in Scotland) are as follows.
A. Employees
The rates at which an employee will pay tax and national insurance is as follows:
Earnings up to £12,570 a year (£242 per week) – No tax or national insurance deducted.
Earnings between £12,570 a year and £50,270 a year (£966 a week) – Total tax and national insurance of 32%.
Earnings between £50,270 a year and £100,000 a year (£1,923 a week) – Total tax and national insurance of 42%.
Earnings between £100,000 a year and £125,140 a year (£2,406 a week) – Total tax and national insurance of 62%.
Earnings above £125,140 a year – Total tax and national insurance of 47%.
There are a few of other points to make.
Firstly, if you earn between £6,396 a year (£123 a week) and £12,570 a year then you will not pay any tax or national insurance but providing only that your employer operates a payroll and declares these earnings to HM Inspector of Taxes then you will receive credits to your national insurance contributions record. This could increase your state pension at retirement.
Secondly, your employer will also pay national insurance of 13.8% on all earnings above £12,570. This increases the cost of your employment to your employer, and some people, therefore, consider that this element should also be included in the above calculations. As an example, this would increase the “basic rate” tax and national insurance deductions from 32% to 40.25%. The other bands above would be similarly affected.
Thirdly, the above rates do not take into account any changes in benefits such as the progressive reduction in child benefits if anyone in a household has earnings in excess of £50,000.
B. Self-Employed
The state benefits, in particular employment protection, available to the self-employed are significantly lower than those available to employees. Whilst the rate of tax is the same as for employees, because of this the normal rate at which national insurance is paid is lower. Therefore, the following rates apply.
Profits up to £12,570 a year (£242 per week) – No tax or national insurance deducted.
Profits between £12,570 a year and £50,270 a year (£966 a week) – Total tax and national insurance of 29%.
Profits between £50,270 a year and £100,000 a year (£1,923 a week) – Total tax and national insurance of 42%.
Profits between £100,000 a year and £125,140 a year (£2,406 a week) – Total tax and national insurance of 62%.
Profits above £125,140 a year – Total tax and national insurance of 47%.
Again, there are a couple of other points to make.
Firstly, in addition to the above, anyone with profits above £6,725 a year will pay an extra flat rate national insurance contribution of £179 a year.
Secondly, the above rates similarly do not take into account any changes in benefits such as child benefits.
Finally, if you are just above the level at which you suffer a major drop in your marginal income, such as earning just above £50.000 or £100,000 then there are things that you can do to reduce your taxable income to below that level We have dealt with these in past articles, and may revisit this in the near future. Meanwhile…
WatkinsonBlack have considerable experience in all areas of taxation and business services. This includes providing a very cost-effective payroll bureau service, as well as assisting to ensure compliance with the latest Making Tax Digital legislation.
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Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.
