National Insurance hike: Expert discusses effect on businesses
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Reaching state pension age generally means one will not have to pay National Insurance even if they continue working. However, self-employed Britons may find they have to fork out a bit more of their hard earned cash even after turning 66.
National Insurance (NI) is split into different classes depending on where people get their income from.
Because of this, self-employed Britons will find themselves paying class four contributions after they reach state pension age.
Class one NI contributions is the most common, encompassing employees earning more than £190 per week and under the state pension age.
This is deducted automatically from one’s earnings by their employer as a percentage of their income.
Additionally, Class one A or one B NI is also paid by employers on their employee’s expenses or benefits.
However, self-employed people fall into classes two and three, depending on their profit levels.
Regardless of whether one is still paying NI contributions at all, self-employed people need to send in Self Assessment tax returns for each year they are in business even past the state pension age.
Class two contributions are for those with profits of £6,725 or more per year, while class four is paid on profits over £9,881 per year.
Those who do not have profits high enough to qualify for class two or four contributions can make voluntary contributions instead, known as Class three NI.
Class two is charged as a weekly rate and class four is a percentage of one’s taxable profits.
Class two contributions, like class one paid by ordinary employees, will stop once someone reaches state pension age.
However, class four operates per the tax year, meaning people will have to continue paying these contributions until the end of the tax year they turned 66 in.
Essentially, if someone reaches state pension age in June 2022, they will have to continue paying class four contributions until April 5, 2023.
Even then, their final class four bill and income tax will be paid on January 31, 2024.
Generally, people who have reached state pension age will only need to pay income tax if their taxable income exceeds their tax-free allowances.
Employees who continue working past state pension age can show their employer proof of their age to ensure they stop paying NI contributions.
This proof can include:
- A birth certificate
- Confirmation letter from HMRC.
Those who choose to use a letter from HMRC, which will confirm that they have reached state pension age and the fact that they do not need to pay NI anymore, must write to HMRC explaining why they do not want to use another form of proof.
HMRC may ask to see their birth certificate or passport for verification if they do not have a record of the person’s date of birth.
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