Salaries are subject to both Class 1 employee (primary) and employer (secondary) national insurance contributions and typically you will be given an employee of a company.
While the planned increase in national insurance was subsequently reversed in November 2022, it is still examinable for all tax exams in 2023. For ACCA, it applies from June 2023 to March 2024.
It is important to remember that any director is a company employee.
If the employee is a higher rate taxpayer, this means that the salary is subject to income tax at 40% and national insurance at 3.25% or 43.25% tax.
This means that for every £100 the higher rate taxpayer earns, the after-tax income is £56.75.
From the company’s perspective, the salary is subject to employer’s national insurance at 15.05% which increases the cost for the employer.
However, the salary and the national insurance is an allowable deduction for computing corporation tax so the company will save corporation tax on the national insurance inclusive cost at 19%.
With regard to P-11D benefits, employees do not pay national insurance unless the benefit is cash convertible (essentially shares which can be sold or options).
The general rule for benefits is to tax the employee on the marginal cost to the employer. This is the extra cost to the employer of providing the benefit.
For a teacher in an independent school whose children are allowed to attend classes, the marginal cost would be the books and materials provided. The actual cost of the tuition would be fixed regardless of the number of students in the class so would not constitute a benefit.
The employer pays Class 1A national insurance on all taxable benefits the most popular of which are cars, accommodation, and loans.
In the case of sole traders, self-employed profits are subject to low Class 2 national insurance and Class 4 national insurance at 3.25% for higher-rate taxpayers.
So, once again a higher rate taxpayer who is self-employed would pay income tax at 40% and national insurance at 3.25% or 43.25% tax.
This means that for every £100 the higher rate self-employed taxpayer earns, the after-tax income is £56.75.
Finally, the employer allowance has increased to £5,000 per employer regardless of the number of employees. So, each employer can reduce their national insurance liability by £5,000.
The employer allowance is not available to companies that have a single employee (in the case of personal service companies).
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