The National Insurance (NI) threshold increase will come into effect this week on 6 July, moving from £9,880 to £12,570, resulting in an upturn in take home pay for millions of people.
Following the change coming into effect, small business finance experts at The Accountancy Partnership are urging SMEs to update their practices in line with the new legislation, in order to avoid paying an unnecessary higher rate of tax.
Lauren Harvey, Assistant Accounts Manager at The Accountancy Partnership, said: “The change to the National Insurance Threshold is a positive step for SMEs and entrepreneurs and will bring a genuine uplift to the pay packets of many if the correct accounting changes are made. It also allows self-employed people to keep more of their hard-earned income before NI is automatically deducted. These changes combined with other recent tax updates mean that the savings to some business owners could be significant if practices are updated.
“However, entrepreneurs and self-employed people must update the way that they pay themselves in order to take advantage of the change, this won’t happen automatically. Currently, the most tax-efficient way for directors working through a limited company to maximise their earnings is through a blend of salary and dividends, and this NI change means the blend should be updated to reflect the greater threshold and tax-free allowance.
“The change also brings a simplification to the tax system – it aligns the personal allowance for income tax and the threshold for the Lower Profits Limit (LPL), both now £12,570. Because the threshold change happens during a tax year, rather than at the start, this year sees an ‘annualised’ amount of £11,908. It’s also worth noting that self-employed people will no longer pay Class 2 NICs on profits between the LPL and the Small Profits Threshold (£6,725) too providing a small saving for as many as 500,000 entrepreneurs.
“In addition, self-employed people should consider the potential impact to their state pension entitlement. Whilst ten years of National Insurance Contributions qualifies as sufficient, they must have paid at least 35 years of contributions to receive the full weekly rate. The new threshold protects SME owners not paying Class 2 NI on profits by continuing to build NI credits, but it could result in a different outcome for those below this bracket. It is therefore crucial that small business owners check whether they’re eligible for voluntary pension contributions to enhance their future security.
“As the backbone of our economy, entrepreneurs and SMEs must continue to be supported through these changes and with the general cost-of-business crisis. It is essential that the government remain receptive to support mechanisms for SMEs. While all changes are detailed on the government website those that are unsure about how the changes impact them should seek extra support from an accounting professional.”
