When someone says “I earn £100,000 a year”, that sounds like a lot. But what really matters to most people is their take-home pay, or how much they keep after tax and National Insurance (NI). At Right Choice Consulting we know that understanding your actual net income is key to financial planning, budgeting and knowing whether you’re better off as an employee or self-employed. In this guide we explore what “£100k after tax” means in the UK tax year 2025/26, what the breakdown is for employee vs self-employed, and how you can smartly reduce your tax burden.

Understanding What “£100k after tax” Means

The phrase “£100k after tax” can be misleading. It could mean:

• You want to take home £100,000 net (after all tax/NI) – in which case your gross income must be higher.

• You earn a gross £100,000 and want to know what you’ll actually receive after deductions.

For most readers, this second scenario applies. You have a gross salary of £100,000, and you ask: how much will I keep?
Getting this number right helps with lifestyle decisions (home purchase, investment, savings) and also helps when comparing employment vs self-employment, or planning for pension contributions. At Right Choice Consulting, our accounting and payroll services help clients map gross to net accurately.

UK Tax Rates for 2025/26 (HMRC Verified)

To calculate take-home pay, we must first understand the UK tax system. For the tax year running from 6 April 2025 to 5 April 2026:

• The standard Personal Allowance is £12,570.

• Income Tax bands:

  • 0 % on taxable income up to £12,570.

  • 20 % (“basic rate”) on taxable income from £12,571 to £50,270.

  • 40 % (“higher rate”) on income from £50,271 to £125,140.

  • 45 % (“additional rate”) on income over £125,140.

Important special rule: If your income exceeds £100,000, your Personal Allowance starts to taper (reduce) by £1 for every £2 earned above £100,000, and is fully lost when income reaches £125,140.
For National Insurance (NI), for employees:

• The Primary Threshold for Class 1 employee contributions is £242 per week (≈ £12,570 annually)

• 8 % on earnings between £242 and £967 per week.

• 2 % on earnings above the Upper Earnings Limit (£967 per week).

Armed with these figures, we can estimate net pay for someone earning £100k.

Take-Home Pay for a £100,000 Salary in 2025/26

Employee scenario – gross salary £100,000

Let’s walk through the calculation step by step (approximate).

Gross salary: £100,000
Personal Allowance: Normally £12,570, but since the income is £100,000, the allowance is reduced: the taper begins at £100,000; however, at exactly £100000, the allowance is still full. Hence allowance = £12,570.
Taxable income = £100,000 – £12,570 = £87,430.

Income Tax:

• First £37,700 of taxable (i.e. from £12,571 to £50,270) at 20% = £37,700 × 20% = £7,540

• Remaining taxable (£87,430 – £37,700 = £49,730) at 40% = £19,892

• Total Income Tax ≈ £7,540 + £19,892 = £27,432

National Insurance:

• Earnings above £12,570 up to £100,000 = £100,000 – £12,570 = £87,430

• From £12,570 to upper limit (£50,270) etc we can approximate: NI at 8% on earnings between £12,570 and £50,270 → £37,700 × 8% = £3,016

• Then NI at 2% on earnings above £50,270 (which is £100,000-£50,270 = £49,730) → £49,730 × 2% = £995

• Total NI approx = £3,016 + £995 = £4,011

Net (take-home) pay: £100,000 – £27,432 – £4,011 = £68,557 approx
Monthly take-home ≈ £5,713; Weekly ≈ £1,318.

Important note on Personal Allowance taper

If you earn somewhat above £100,000 your allowance reduces. For example, at £110,000 your allowance would be £12,570 – (£10,000 ÷ 2) = £7,570 (because £10k above £100k means £5k reduction), making taxable income higher and effective tax rate greater. This is often called the “lost allowance” zone.

Summary table

• Gross: £100,000

• Income Tax: ~£27,432

• National Insurance: ~£4,011

• Approx Take-Home: £68,557

At Right Choice Consulting, we help clients run these calculations for their personal circumstances and show how small adjustments (e.g., pension contributions) can raise the net figure.

Self-Employed Income – £100k After Tax

If instead you are self-employed (sole trader) earning £100,000 profit before tax, the calculation is slightly different: you pay Income Tax (same bands) plus Class 2 and Class 4 National Insurance, not Class 1.

For illustrative purposes:

• Assume profit £100,000, no other reliefs.

• Personal Allowance still £12,570, taxable income £87,430 (as above) → Tax ~£27,432.

• Class 4 NI: rate is 9% on profits between £12,570 and £50,270, and 2% above that (2025/26). Rough calculation:

  • £37,700 × 9% ≈ £3,393

  • £49,730 × 2% ≈ £995

  • Total Class 4 NI ≈ £4,388

• Class 2 NI is a flat, small amount (approximately negligible for this scale).

• Estimated net = £100,000 – £27,432 – £4,388 = ≈ £68,180

The difference between employee vs self-employed isn’t huge at exactly £100k for these approximations, but depending on deductions, pension contributions, expenses, the self-employed may have more scope to reduce taxable profit, and hence net income can vary. Our Payroll and Bookkeeping Services assist businesses and sole traders in maximising net income legally.

Reducing Your Tax Legally

If you’re aiming to keep more of your £100k income:

• Pension contributions: By contributing to a pension scheme, you reduce your taxable income.

• Salary sacrifice: For employee,s you may sacrifice salary into a pension or other benefits, reducing tax and NI.

• Allowable expenses: If self-employed, ensure you claim all business expenses before profit.

• Charitable donations / Gift Aid: Can reduce higher-rate tax liability.

• Review structure: Sometimes, working through a limited company may give advantages (depending on circumstances).
  At Right Choice Consulting, our Accounting Services include tailored tax planning to maximise income after tax while fully compliant with HMRC.

How Right Choice Consulting Can Help

Whether you’re an employee earning £100k or a business owner/self-employed individual, our firm aids in:

• Accurate net income projections (give you your true “100k after tax” figure).

• Structuring payroll and company affairs (via our Payroll Services).

• VAT, corporation tax, compliance — we link all your accounting needs.

• Planning for changes: e.g., pension changes, bonus income, self-employment profits.
  For a tailored assessment, visit our Contact Us page or request an Instant Quote.

Frequently Asked Questions

Is £100k a good salary in the UK?
Yes — it is above the UK average and places you in a relatively high income bracket. But taxes and living costs (especially in London) mean net income matters more than gross.

How much tax would I pay if I earn £100k?
As we outlined: ~£27,432 income tax plus ~£4,011 NI (if employee), leaving approx £68,557 take-home for tax year 2025/26.

What’s the difference in take-home between being employed vs self-employed, earning £100k?
Approximately £300-£500 difference in our scenario, but the actual difference depends on expenses, pension contributions, and tax planning.

How can I pay less tax legally?
Use pension contributions, salary sacrifice, and deductible expenses (if self-employed), and make sure your accounting and tax filing is optimised.

Final Thoughts – Plan Smart, Keep More

Earning £100,000 is a strong position — but what matters is how much you take home. With the tax year 2025/26’s fixed thresholds and tapering of allowances after £100k, that net figure is crucial. At Right Choice Consulting we advise that you don’t just focus on gross; you focus on net income, tax planning and efficient payroll/accounting. If you’d like us to calculate your precise net income and suggest ways to improve it, we’re ready to help.

When it comes to vehicle parking, VAT may not be the first thing that comes to mind — yet it plays a crucial role for both businesses and individuals. Whether you operate a car park, rent out parking spaces, or simply claim parking expenses, understanding VAT on car parking is essential for compliance and cost efficiency.

At Right Choice Consulting, our tax experts specialise in clarifying complex VAT rules. This detailed guide explains how VAT applies to parking, who should charge it, and how businesses can reclaim it correctly.

What Is VAT on Car Parking?

VAT (Value Added Tax) is charged on most goods and services supplied in the UK. When it comes to parking, VAT rules depend on:

• Where the parking occurs (on-street or off-street),

• Who provides the parking (local authority or private operator), and

• How the charge is classified (supply of parking or statutory fee).

If you operate a private car park, offer paid parking at your business premises, or manage off-street spaces, you’ll most likely need to charge VAT at the standard rate of 20%.

For professional help managing VAT obligations, explore our VAT Services in London.

On-Street vs Off-Street Parking: Key Differences

On-Street Parking

On-street parking usually refers to bays or meters provided by local authorities. These services are considered part of the authority’s statutory duties, not a business activity. Therefore, such parking is outside the scope of VAT — no VAT is charged, and none can be reclaimed.

Off-Street Parking

Off-street parking includes spaces in car parks, garages, or other private facilities. Since this involves a commercial transaction, VAT is chargeable at 20%.
For example:
If a car park charges £10 for an hour’s stay, this amount includes £1.67 VAT. The operator keeps £8.33 as revenue and pays £1.67 to HMRC.

If your company provides or manages parking for clients, our Accounting Services team can help you correctly record and report VAT on these transactions.

When VAT Does Not Apply to Parking

VAT doesn’t apply in every case. Some parking activities are exempt or outside scope, such as:

• On-street parking managed by local councils.

• Penalty charges or fines for overstaying time limits — these are not considered payment for a supply.

• Free parking — where no fee is charged, there’s no taxable supply.

• Certain public service or charitable facilities, if not operated commercially.

If you’re unsure which category your parking activity falls under, speak to our experts via Contact Us.

VAT Rate and Threshold for Parking Operators

The standard VAT rate in the UK is 20%. Any private operator or business supplying off-street parking must register for VAT if their taxable turnover exceeds £90,000 per year (current HMRC threshold as of 2025).

Once registered, you must:

• Charge VAT at 20% on parking fees.

• Issue VAT invoices showing the net, VAT, and total amounts.

• Submit VAT returns and pay the tax due to HMRC quarterly or annually.

If you’re unsure about registration, our team at Right Choice Consulting can assess your turnover and help you stay compliant with VAT registration requirements.

Reclaiming VAT on Parking for Business Use

Businesses often incur parking expenses during travel or client meetings. The ability to reclaim VAT on parking depends on two key factors:

1. VAT must have been charged — off-street parking is VATable, on-street is not.

2. The expense must be for business purposes.

Example:
A VAT-registered consultant pays £15 to park in a private car park while attending a client meeting. Since the operator charged VAT, the consultant can reclaim £2.50 as input tax.

However, if parking is used personally or not directly related to business, the VAT cannot be reclaimed. For more help managing such expenses, visit our Bookkeeping Services page.

Common Scenarios and Their VAT Treatment

If you manage or rent spaces and want clarity, our VAT specialists can help interpret complex scenarios accurately.

Special Considerations for Businesses and Landlords

Parking Provided to Employees

If you offer parking to employees, VAT treatment depends on whether it’s a business expense or a benefit in kind. Typically, VAT on the cost of employee parking can be reclaimed if it’s necessary for business operations.

Leasing or Renting Parking Spaces

Letting or leasing a parking space can sometimes be exempt from VAT if it falls under property letting rules rather than commercial supply. However, most short-term or public parking leases remain standard-rated.

Our Company Formation and VAT teams work together to ensure that newly formed businesses apply the correct VAT treatment from day one.

Avoiding VAT Mistakes on Parking

VAT errors are common in the parking industry — and costly to fix. Here are some frequent mistakes to avoid:

1. Assuming all parking is VAT-free. Only on-street parking is outside VAT.

2. Charging VAT on penalties or fines. These are not taxable supplies.

3. Failing to register for VAT once turnover exceeds £90,000.

4. Incorrectly reclaiming VAT on personal or mixed-use parking.

5. Misclassifying a parking lease as a service rather than property letting.

For ongoing compliance, consider a consultation with our Tax Specialists to review your VAT processes.

How Right Choice Consulting Helps with VAT on Parking

At Right Choice Consulting, we provide a complete range of VAT and accounting solutions for businesses across the UK. Our services include:

• VAT Registration & Compliance — Ensuring your car park or parking facility is VAT-registered correctly.

• Bookkeeping & Record Keeping — Managing VAT invoices and reconciliation for parking income and expenses.

• Tax Planning — Helping businesses structure parking and property income efficiently.

• HMRC Liaison — Managing VAT returns, audits, and any queries from HMRC.

You can explore more about our Accounting Services or request a personalised consultation through our Instant Quote.

Example: VAT Breakdown for Car Park Operators

Let’s illustrate how VAT works in practice:

Scenario:
A VAT-registered parking operator charges £5 per hour.

• Net price: £4.17

• VAT (20%): £0.83

• Total charged: £5.00

For every £5 collected, £0.83 must be paid to HMRC as output VAT.
If the operator incurs business expenses (e.g., maintenance, ticket machines, or cleaning) that include VAT, they can reclaim that input VAT to reduce their liability.

Key Takeaways

• Off-street parking is subject to VAT at 20%.

• On-street parking by councils is outside the scope of VAT.

• Penalty fees and fines are non-taxable.

• Free parking has no VAT implications.

• Businesses can reclaim VAT on valid parking expenses.

• Operators must register if their taxable turnover exceeds £90,000.

If your business provides or uses parking services, proper VAT handling can prevent costly mistakes and improve cash flow.

Final Thoughts

Understanding VAT on car parking can save your business time, money, and stress. At Right Choice Consulting, our goal is to simplify VAT compliance for companies of all sizes. Whether you operate a parking facility, lease spaces, or simply pay for parking as part of daily operations, we can help you:

• Identify VAT-able and non-VAT-able activities.

• Maximise VAT reclaims.

• Ensure compliance with current HMRC rules.

To discuss how VAT rules affect your parking business, contact our experts today or get an instant quote for tailored VAT support.

PAYE

Tax code changes

The emergency tax code for the 2023/24 tax year remains at 1257L, and there are no uplifts in tax codes.

The tables below show the bandwidths for the rest of the UK, Scotland and Wales.

Rest of UK Bandwidths & Rates

National Insurance

Earnings bands

NI Category A Rates

Statutory payments

The Statutory payments rates are changing from 6 April 2023.

Statutory sick pay

Employees on weekly earnings greater than or equal to the Lower Earnings Limit are entitled to a statutory weekly rate of £109.40 from 6 April 2023.

New statutory sick pay rates:

Parental pay and leave

The rates below come into effect from the first Sunday in April.

New Parental pay and leave rates:

Student loans

When you set up a student loan deduction for an employee, you must specify whether they’re on Plan 1, Plan 2 or Plan 4.

Employment allowance

For the 2023/24 tax year, Employment allowance is £5,000.

National minimum / living wage rates

The following rates are effective from 1 April 2023.

Apprenticeship Levy

The Apprenticeship Levy Allowance is set to £15,000.

The Apprenticeship Levy Rate is set to 0.5%.

You’d be surprised by how many people earning over £100,000 are not aware that they need to do a tax return. In fact, it catches loads of people out year on year because having to do a tax return for being a high earner is not widely publicised by HMRC. They’re not deliberately trying to catch you out, but they do assume that it’s common knowledge.

And if we can be sure of anything to do with tax, it’s that very little is common knowledge to anyone but accountants!

What changes when you earn over £100k?

Let’s first talk about the Personal Allowance. The Personal Allowance lets you earn the first portion of your income tax-free. In the 2021/22 tax year, this portion is the first £12,570 that you earn. People that earn less than £12,570 don’t pay Income Tax on their earnings.

When your income is higher than £100,000, your eligibility for the Personal Allowance reduces on a sliding scale. And this affects you if you’re employed, self-employed, employed and self-employed etc. Basically, no matter what tips your overall earnings over the £100,000 threshold, you’ll still be affected by this rule.

For every £2 that you earn over £100,000, you lose £1 of your Personal Allowance. This change in your taxable income is called your adjusted net income. When you reach £125,140, you lose your tax-free entitlement totally.

Why do I need to do a tax return?

HMRC need to check that your adjusted net income is correct. They estimate the tax you should be paying via your tax code. But if your tax code is wrong, you could be hit with a hefty tax bill each January.

What most people also don’t know is that ensuring that you’re on the right tax code is your responsibility, not HMRC’s 🤯

We therefore recommend that you check your tax code at the start of each tax year to make sure that you’re on the right one. Also if HMRC ever issue you with a new code, you should get in touch with them to make sure that it’s the correct one based on your circumstances. That allows you to get it sorted as early as possible, in case you do in fact owe money.

Things to be aware of

• Being taxed via a salary (PAYE) doesn’t guarantee that you’re on the right tax code
• The earlier you do your tax return, the sooner you know what you’ll owe (or be owed) on 31st January
• When you earn between £100,000 and £125,700, you pay 60% tax – here’s what you can do to avoid it
• If you owe less than £3,000 in tax, you can pay this via PAYE if you file by 30th December but be careful doing this if you were on the wrong tax code because it may cause more confusion
• Things that can tip your income over the £100,000 mark without you realising are:
  • Bonuses
  • Company shares vesting

Our advice?

Get your tax return sorted as early as possible after the new tax year begins so that you can get prepared to save, should you need to.

What’s the Most Tax Efficient Director’s Salary in 2022/23?

As a director you’re legally separate from your limited company, even if you’re also the owner. This means that you’re not allowed to simply keep the profits for yourself in the same way that a sole trader can.

Instead, you’ll need to decide how much to pay yourself. The most tax-efficient way to take an income from your own limited company is normally through a combination of a low salary (in the same way an any other employee) and dividend payments.

Why should I pay myself a director’s salary as well as dividends?

As a director, you’re technically an employee of your own limited company. Employers and employees both pay National Insurance Contributions (NICs) on salary payments, but not on dividends, so it makes sense to pay yourself a smaller salary and make up for it with dividend payments.

But the good thing about taking a salary is that is means you have regular income throughout the year which, because directors are ‘office holders’, can be below minimum wage without breaking any rules.

So how much should you pay yourself from your own company? Paying yourself as a company director is actually a bit of a balancing act in order to be as tax efficient as possible.

To get the balance right you’ll need to consider National Insurance contributions as an employee and employer, how many people there are in the business, tax allowances for dividends and for income, tax relief for employee salaries, and even the benefits of making qualifying payments for the State Pension.

Sit tight, and we’ll talk you through director’s salaries, and what the optimum amount to pay yourself is. We know it can be confusing, so get an instant quote online if you need more help!

National Insurance and director’s salaries

The thresholds for employer’s and employee’s NI are different, so this has an impact on the amount of salary that you take. If you take a salary from the business and it’s higher than the National Insurance threshold (the point at which you start paying National Insurance) for both employer and employee NI:

• Your company, as your employer, has to pay employer’s National Insurance Contributions.
• You, as the employee, pay National Insurance on the salary that your company pays you.

It basically means you’re paying National Insurance twice on the same money – which isn’t very tax efficient at all!

The 2022/23 NI thresholds for employers and employees are shown in our table below. The threshold for employers is actually lower, so they start paying NI sooner than employees.

If you need to refer to the figures for 2021/22, you can view them in our tax rates article.

2022/23 Employer and employee National Insurance thresholds

Qualifying for the State Pension

Taking a salary which is higher than the Lower Earnings Limit (£6,396 per year in 2022/23) allows directors to build up qualifying years for their State Pension.

If your salary is above the LEL but below the Primary Threshold (£9,880) then you’ll accrue all the benefits of NI, without actually paying it. This will affect how much State Pension you are entitled to once you pass state retirement age.

Using the tax-free Personal Allowance on your director’s salary

Your Personal Allowance is the amount you are allowed to earn before you have to start paying income tax.

In 2022/23, the Personal Allowance is £12,570.

You only pay tax on the part of your income that is above the Personal Allowance threshold. For instance, if you earn £14,000 in a year, you’ll only pay income tax on £1,430 of it.

£14,000 (salary) – £12,570 (tax free Personal Allowance) = £1,430. The amount subject to income tax is £1,430.

If you take a salary from your limited company which is below the Primary Threshold for National Insurance (£9,880) you won’t pay tax or NI on it.

Paying tax on dividends

It’s worth noting that although they’re not subject to NI, dividends are subject to tax, but at a different rate to normal income tax. The good news is that there is also a separate dividend tax allowance that you can use on top of the Personal Allowance.

In 2022/23, the Dividend Allowance is £2,000.

Salaries are an allowable expense for Corporation Tax

A limited company pays Corporation Tax on the profit that it makes throughout the year. Claiming tax relief on allowable expenses reduces the amount of profit, therefore reducing the amount of Corporation Tax which the company pays.

Salaries are an allowable expense, so if you’re a company director then paying yourself a salary from the business can help you lower your corporation tax bill.

How does the NI Employment Allowance affect director’s pay?

Thanks to the Employment Allowance, the optimum salary for a company director also depends on how many other people there are in the business.

In 2022/23 eligible employers can use the Employment Allowance to claim up to £5,000 in order to cover the costs of employer’s National Insurance.

To be eligible, employers must have at least 1 employee, or 2 directors, on the payroll, and the directors must not have another company that is claiming the Employment Allowance already. This means that sole directors can’t claim the allowance, which is why the optimum salary is a bit different for them.

2022/23 Director’s salaries – How much should I pay myself from my limited company?

Considering all the taxes and allowances together, the most tax-efficient salary for a limited company director depends on whether they’re a sole director, or there are more people in the business.

• The optimum salary for a sole director in 2022/23 is £9,100.
• The best salary if there are two or more directors is £11,908.

What is the best company salary for sole directors in 2022/23?

The most efficient salary for sole directors in 2022/23 is 

£758.33 per month.

If you’re the sole director and pay yourself a salary through your own limited company, the best amount to pay yourself is £9,100 per annum (or £758.33 a month). This is because:

• It’s at the secondary threshold so your company won’t need to pay employer’s NI on it.
• This salary is lower than the primary threshold, so you won’t need to pay employee’s NI.
• It’s above the Lower Earnings Limit, so you will still earn NI credits, which is great news for your state pension.
• This is less than the tax-free Personal Allowance threshold.
• A sole director cannot claim the Employment Allowance.

What is the most tax efficient salary for two or more directors in 2022/23?

Having 2 or more directors on the company payroll means that you’re eligible to claim the Employment Allowance. In 2022/23 the primary threshold will increase mid-year.

This means that the point at which you start paying employee’s NI will be £9,880 until July 2022, when the threshold increases to £12,570. Over the year, the optimum salary in a company with two or more directors is £11,908

The most efficient salary for 2 or more directors in 2022/23 is 

£11,908.

This is because two or more directors can take an annual salary up to the primary threshold without needing to pay employee’s NI, and then claim the £5,000 Employment Allowance to cover the portion of employer’s NI they would otherwise incur.

What if I have another source of income?

The optimum amount for director’s payroll takes advantage of the Personal Allowance (£12,570), but if you are already using it up because you have other income from elsewhere, then director’s payroll becomes PAYE payroll, and subject to tax and NI as normal.

Now that we are approaching the end of the year, we are all starting to think about our taxes, and as the tax deadline is just a few months away, the sooner you get your self-assessment tax return file prepared, the better. This will also save you from a lot of worries. With that being said, are you planning to prepare everything all by yourself, or do you need the help of an accountant to get your job done? Well, it is always a better idea to hire an accountant who would do the job for you in a better and more professional way. So, let us have a look at some of those people for whom it is really important to hire an accountant for their tax return.

Whether it is a startup or an established organization, bookkeeping services are important for everyone. However, small businesses work on a very tight budget, and they also do not have sufficient resources available who would carry out all the bookkeeping and accounting services. So, it becomes very important for such companies to rely on bookkeeping and accounting services. The professional accounting service providers will get the entire job done for you, and you will also be able to have a better understanding over the cash flow of your organization.

When HMRC refuses to talk to a tax agent the problem is usually a missing client authorisation to act, but there are numerous and confusing ways to secure this.

 The most common way to authorise an agent to act is for a new client to complete a form 64-8, either online or on paper.

Smaller companies are finding share schemes offer a cost-effective way to show employees they are appreciated.

Cash bonuses or vouchers are the simplest and most common way for employers to express their appreciation for employees. Sometimes to remain attractive to employees, businesses will also provide additional benefits such as a company car, private medical cover or the use of a holiday home.

Here’s what you need to know about the changes to national insurance contributions announced by Rishi Sunak on 23 March.

Employers’ class 1 NIC

The secondary class 1 NIC rates and thresholds (paid by employers) were not altered in the Spring Statement, and the rate is increasing from 13.8% to 15.05% on 6 April 2022.

For 2022/23 the various secondary class 1 NIC thresholds are:

Employees’ class 1 NIC

The rates of primary class 1 NIC paid by employees are increasing on 6 April 2022 from 12% to 13.25% and from 2% to 3.25% for the upper rate.

The lower earnings limit (LEL) has not been changed from the proposed level for 2022/23, which will be: £123 per week, £533 per month, £6,396 per year. On earnings between the LEL and the primary threshold, the employee pays class NIC at 0%, thus receives NIC credit for those wages.

The upper earnings limit (UEL) has also not been changed by the Spring Statement, and will stay at the proposed thresholds for 2022/23 of £967 per week, £4,189 per month, £50,270 per year. On earnings above the UEL, the employee will pay class 1 NIC at 3.25% for 2022/23.

The complication introduced by the Spring Statement is that the primary threshold (PT) for class 1 NIC will change part way through the tax year on 6 July 2022. The employee will pay class 1 NIC at 13.25% on earnings between the LEL and the PT for 2022/23.

As NIC is paid according to the pay period, and is not cumulative, only nine months of earnings (from July 2022 to March 2023) will benefit from the higher PT.

Company directors tend to use an annual or quarterly earnings period. Those on quarterly pay will use the lower threshold for the first quarter to 5 July 2022, and the higher PT for the remainder of the year. Those on annual earnings period will use a PT of £11,908 for 2022/23 as specified in clause 4(2) of the National Insurance Contributions (Increase of Thresholds) Bill 2022.

Self-employed class 4

The lower profits limit (LPL), from which class 4 NIC becomes payable, is also increased to align with the personal allowance of £12,570, but over two years. The upper profits limit is frozen at £50,270.

* Including Health and Social Care levy

For 2022/23 the LPL will be £11,908, that is nine months of the increased level, to make it equivalent to the same NIC allowance enjoyed by employees. Although the self-employed individual will pay class 4 NIC at the main rate of 10.25%, which is three percentage points lower than the class 1 NIC paid on the same income band by an employee.

Self-employed class 2 NIC

The class 2 NIC paid by the self-employed creates a contribution record for the individual, unlike the class 4 NIC, which is a pure tax.

The class 2 small profits threshold (SPT) will remain in place from April 2022, but the individual will not be liable to pay class 2 NIC until their profits exceed the lower profits threshold for the tax year, which is aligned with the lower profits threshold for class 4 NIC.

New class 2 NI credit

Where the individual has annual profits between the SPT and the LPL, they will effectively build up a NI credit for that year, while paying zero class 2 NIC. Note that the taxpayer has to make profits at least equal to the SPT for the year in order to benefit from this class 2 NI credit.

In order to receive the class 2 NI credit the taxpayer will have to submit a tax return, although if they have no other income in the year they will have no tax to pay.

The introduction of the class 2 NI credit does not eliminate the need for voluntary class 2 NIC payments. Where the trading profits are less than the SPT the individual may still wish to pay voluntary class 2 NIC in order to maintain their contribution record and qualify for the state pension, as well as for other contributory benefits.

Future alignment

Now that the starting thresholds for all flavours of NIC and income tax are to be aligned, perhaps this could be the first step toward aligning the rules for these two taxes.

The sticking points will be the pay periods for which NIC is calculated, compared to the annual nature of income tax. Also, Scottish income tax has completely different thresholds for its five rates compared to the two thresholds for income tax that apply in the rest of the UK.