Self-employed NICs lines include Class 2 contributions in the average rate, but exclude them in the marginal rate. However, the link between contributions and benefits has weakened over time, to the point where there is now barely any connection at all between the amount of NICs paid and the amount of benefits received.
Throughout the many reforms to both contributions and benefits that have taken place over the years, minimal attention has been paid to closeness of the link between the two. By far the biggest contributory benefit is the state pension. But it is now quite hard to live in the UK and not earn entitlement to a full state pension. The contributory system does serve to withhold certain benefit entitlements from some small groups.
But its main practical function nowadays is to ensure that foreigners cannot retire to the UK and claim a full state pension. There may be a case for a genuine social insurance system, but it is not what we currently have.
There are still a number of contributory benefits:. Some other historical benefits are still being paid for which entitlement depends on past contributions, but new contributions no longer generate new entitlements to them. We do not describe these benefits here, or the complicated rules that relate contributions to entitlements. The important fact is that in practice there is very little link between the amount of contributions someone pays and the benefits they receive, for several reasons:.
The self-employed accrue entitlement to contributory benefits via their Class 2 not Class 4 contributions. But the value of these reduced entitlements is small: nowhere near enough to justify the much lower NICs levied on self-employment income than on employment income. Self-employed people who earn less than the small profits threshold, and therefore do not have to pay Class 2 NICs, can choose to pay them voluntarily in order to build up benefit entitlements.
They can be paid in a variety of circumstances, but in practice very few people do so, typically UK citizens living but not working abroad in order to maintain their entitlement to benefits when they return. NICs are often thought of as being ring-fenced to pay for the contributory benefits described above, or to pay for the National Health Service.
The reality is different. That is topped up from general taxation to whatever the government wishes to spend on the NHS in total: how much of that total notionally comes from NICs revenue is irrelevant. Notionally, the NI Fund is financially separate from other parts of government and is used to fund contributory benefits. In reality, however, this separation is illusory. In years when the fund is not sufficient to finance benefits, it is topped up from general taxation revenues; and in years when the fund builds up a surplus, it is used to reduce the national debt: essentially, the government lending money to itself.
This makes the separation of the NI Fund from the main government account more or less meaningless. The UK has two taxes on income — income tax and National Insurance contributions.
Read more along with income tax by employers and the self-employed. Read more schedule for someone whose income is stable and comes entirely from earnings. The charts assume all income is from earnings. Employment lines assume earnings are stable throughout the year and ignore the employment allowance. Read more rises or falls.
But it also reflects a lack of alignment between income tax and NICs. At present, the upper earnings limit and the upper profits limit UPL are aligned with the higher-rate threshold except in Scotland.
The schedule in Scotland looks even more complicated than that in the rest of the UK. Aligning thresholds within the current system matters less than it might seem for simplification, however. Since income tax and NICs are assessed over different periods annual for income tax, pay period for Class 1 NICs and on different measures of income, it is quite possible for someone to be above the income tax higher-rate threshold but below the UEL, or vice versa, anywhere in the UK.
Given the similarity of the two taxes, it would be simpler — both more transparent and less administratively burdensome — if they were merged into a single tax. Most of the remaining differences between the two taxes could be retained if that were considered desirable for example, a combined tax could be charged at a lower rate on items that are currently subject to one tax but not the other ; but integration would underline the illogicality of most of the current differences between the two taxes and provide an opportunity to remove them.
Calls for such integration have been widespread for many years, but successive governments have rejected them. What travel expenses can I claim? What if I use my own car for business purposes? Payroll giving Allowances and expenses paid to armed forces personnel and deductions from their income Pensions and employees What is automatic enrolment for employees? What National Insurance do I pay as an employee? How do I repay my student loan?
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What is the tax position when I take money from my pension flexibly? How do I cash in my small pension? What tax do I pay on my state pension lump sum? Most people pay both through Self Assessment. You may be able to pay voluntary contributions to avoid gaps in your National Insurance record if you:.
If you have gaps and do not pay voluntary contributions, this may affect the benefits you can get , such as the State Pension. You might be an employee but also do self-employed work.
In this case your employer will deduct your Class 1 National Insurance from your wages, and you may have to pay Class 2 and 4 National Insurance for your self-employed work.
How much you pay depends on your combined wages and your self-employed work. Check what you need to do. To help us improve GOV. It will take only 2 minutes to fill in. Find out more : Tax-free income and allowances. Extra payments, such as bonuses, from your employer are normally treated as salary and taxed in the normal way. However, some lump-sum payments are tax-free. These include:. A genuine personal gift from your employer — for example, on getting married — is also tax-free, but the onus will be on you to show that it really was personal and not as a result of your being an employee.
If there is no income tax on a lump sum you receive, there will usually be no National Insurance contributions either. HMRC will send out a P tax calculation form after the tax year ends on 5 April, which you should receive by the end of November.
To rectify this, it will adjust your tax code for the following year — often resulting in a reduced personal allowance, so you pay tax on a larger proportion of your salary. In some cases, taxpayers can appeal this payment on the grounds that the tax authorities had the full details of their earnings, but failed to act on them in time Extra-Statutory Concession A If you believe you've overpaid in tax, but HMRC has not refunded you, contact them directly to claim a refund or file a claim online.
To adjust the amount of tax you pay each month, HMRC will reduce your personal allowance. This Concession allows HMRC to give up income tax and capital gains tax in instances where it has failed to make proper or timely use of your financial information. Financial Services Limited. Financial Services Limited is a wholly-owned subsidiary of Which?
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In this article. What is PAYE? How is PAYE calculated?
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