25 Feb
Income Tax and National Insurance (NI) Basics
UK citizens have to pay the income tax bill that is levied on several types of earnings. These can range from employment wages, profits from running a business, rental income from property, dividends from shares. It is imperative for each citizen to get accustomed to income tax and national insurance basics to be able to file their tax returns efficiently.
Most of the tax-paying individuals in the UK qualify for a Personal Allowance. This gives individuals a significant tax break by reducing the amount of taxable income while paying tax. Anyone can be eligible for a Personal Allowance, including students. The sum may vary depending on your tax history and the allowances claimed. Though it is to be noted that you must not include personal or financial information like your credit cards and National Insurance number without consulting your accountant first. In some instances, you don’t have to pay tax on your entire taxable income. The details regarding Personal Allowance are explained below in more detail:
What Do You Need To Know About Personal Allowance?
The personal allowance is the amount of tax-free income that an individual can enjoy. Personal allowance may vary from individual to individual. For example, the personal allowance may be greater if a person has claimed a marriage allowance or a blind person’s allowance. Some individuals can be qualified for a lesser amount due to taxes they might owe for previous years.
For the year 2021/22, the standard personal allowance is £12,570 and will continue to be the same for the upcoming five years until 2026. As the government tries to relieve pressure forced upon it due to debts accrued as a result of Brexit. However, this could mean that thousands of taxpayers would be liable for higher amounts in tax in upcoming years. Additionally, If your income falls below the standard personal allowance, you will not be liable to pay any income tax.
Summary of allowances for the year 2021-2022:
What about your personal allowance if you earn over £100, 000?
As soon as your income reaches the threshold of £100, 000, the rules change because your personal allowance is reduced by £1 for every £2 you earn over the threshold of £100, 000. Meaning that if your net income exceeds £125,140, your personal allowance would be zero, and the entire amount would be taxable.
How Is The Payable Income Tax Determined?
Generally speaking, the amount of income tax you are liable to pay depends on two factors:
- The amount of income that falls within each tax band.
- The amount of income that falls above your personal allowance.
Remember that the tax year begins from 6th April and ends on 5th April the following year.
You may want to speak to a tax accountant to help you calculate the correct amount of income tax you owe to HMRC.
How much income tax you are liable to pay?
The amount of income tax you pay is subject to different tax bands. This implies that the more you earn, the more income tax you have to pay. The reason behind the proportionality is to encourage people to contribute a higher portion of their earnings to the Government’s treasury in taxes if they are earning higher. So it is important to consult your accountant to know more about how much tax you need to pay to stay compliant.
The table below reveals the income tax rate for the tax year 2021-22 that you are liable to pay depending on how much you earn:
For 2021/2022:
| Taxable income | Band | Tax rate (%) |
| Up to £12,570 | Personal allowance | 0% |
| £12,571- £50,270 | Basic rate | 20% |
| £50,271- £150,000 | Higher rate | 40% |
| £150,001 and above | Additional rate | 45% |
An erroneous calculation of the income tax is a common problem faced by many individuals in the UK. It is therefore advisable to speak to our in-house tax accountants, before calculating your income tax and filing your annual tax rAn erroneous calculation of the income tax is a common problem faced by many individuals in the UK. Therefore, it is advisable to speak to our in-house tax accountants before calculating your income tax and filing your annual tax returns.
What is the purpose of income-tax collection?
The collection of the income tax collection lies with Her Majesty’s Revenue and Collections department, in tax year 18-19 alone HMRC 556 billion British pounds, showing an increase of 300 billion compared to 2000/01. The income tax collected is reinvested in the public service sector. It improves public projects like infrastructure development, real estate, railways, public parks, etc.
National Insurance
What do you need to know about National Insurance (NI) on employment income?
National Insurance contributions are tax payments that are meant to be made from your income. These tax payments make you eligible to enjoy specific benefits like the State Pension and Maternity Allowance. You are not required to pay NI annually, but you will be required to make NI contributions according to your employer’s arrangement.
These can be monthly, weekly or quarterly instalments – depending on the employee’s contract. This implies that if you earn more than the regular income amounts, you will make extra NI contributions. Also, once you pay that extra income as NI contribution, you can not claim that amount back even if you earn less during the other periods of the tax year.
According to the 2021/22 rules, you have to pay National Insurance once you earn more than £184 per week. The rate of National Insurance you are liable to pay depends on your earnings:
- For weekly earnings between £184 – £967 = 12%
- For weekly earnings above £967 = 2%
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What do you pay National Insurance on?
You and your employer are legally required to pay National Insurance contributions on your income, including sick leave pay, holiday pay or maternity leave pay. Usually, they are paid on any benefit or reward that is highly liquid. There are some flexibilities to this rule; you might be exempted if a portion of your income is in the form of shares in the company you are employed with; this can be achieved with the help of tax-approved share schemes.
If you are entitled to certain benefits, you as an employee are not liable to make National Insurance contributions. However, there are also exceptions to this rule where employers must pay NI on the monetary value of any benefits they are entitled to enjoy.
What does your National Insurance cover?
Paying for National Insurance helps you enjoy various state benefits and services, which include:
- The State Pension.
- Unemployment benefits.
- The National Health Service (NHS).
- Sickness and disability allowances.
What do you need to know about Voluntary ‘Class 3’ National Insurance rates?
The purpose of Class 3 voluntary National Insurance Contributions is to help you get a higher State Pension by filling any gaps in your National Insurance record. You may receive a full new State Pension once you reach the State Pension age or if you have 30 qualifying years of National Insurance contributions. If you have less than 30 qualifying years of National Insurance Contributions, you may receive a reduced State pension. A minimum of 10 qualifying years of NI contributions is required to obtain the new State Pension.
We advise you to pay Class 3 voluntary contributions to increase your pension entitlement. From 2021-22, you can pay Class 3 contributions at a rate of £15.40 per week (maximum amount payable per week).
What do you need to know about Voluntary ‘Class 2’ National insurance rates?
Voluntary Class 2 NI contributions can be made if you are running your own business, working as a self-employed individual, or working in a foreign country.
For 2021/22, you have to make weekly Class 2 NI contributions at a flat rate of £3.05 per week If you earn £6,515 (the small profits threshold) or more as profits in the year 2021/2022.
Making Class 2 NI contributions is optional for any self-employed individual, making profits lower than the small profit threshold. However, we advise you to pay Class 2 NI even if you are below the small profit threshold to increase your entitlements to state benefits.
What do you need to know about Voluntary ‘Class 4’ National Insurance rates?
If your profits as a self-employed individual are £9,568 or more, you need to pay class 4 NI, this is payable at 9% on profits above £9,568 while the NICs Upper Earnings Limit is set up to £50,270, and 2% on earnings above £50,270.
Author Bio
Jinesh is a Senior Business Accountant, with a masters in Finance from Westminster University, and specializes in tax and accounting for small to medium businesses with a turnover of less than £ 3 Million.
He specialises in helping creative businesses understand and manage their accounting and tax needs and obligations.
As accounting ecosystems evolve, their potential to add value also grows. This has increased the focus on digital solutions to tackle complex business problems. Jinesh helps businesses see the opportunity in this and helps businesses become more efficient and increase performance, using the right solutions.
Some of the key things he focuses on are:
- Helping businesses gain insights from their business data
- Providing complex tax and accounting solutions
- Helping businesses prepare for complex industry developments and changes