If you’re a serial entrepreneur you might have two or more directorships, each of which pay a salary. This sometimes results in excessive NI charges. Is there a legitimate way to dodge this?
NI - the hidden tax
It’s easy to think about NI contributions as a minor cost, but nothing could be further from the truth. For example, in 2017/18 someone with a salary of £25,000 will pay tax of £3,000 while the total NI bill for them and their employer will be £4,344. In reality, NI is simply a tax on earnings, and like other taxes is easy to over or under pay.
NI overpayments occur for many reasons. Often it’s paid on income when it isn’t due, e.g. on certain employment-related perks. HMRC isn’t usually to blame in these situations, it’s more a case of employers not understanding the tricky rules. On the other hand, HMRC could help by simplifying the way NI is calculated, particularly how the upper NI limit is applied.
NI is worked out for each employment and self-employment on a standalone basis. This means that if you have two jobs, say a directorship with two companies, you could pay the maximum NI on each. That would be about £4,400 too much per year. The position is similar where you are both employed and have a self-employed job.
No NI return form
The trouble is that, unlike tax, there’s no annual return form to report income on which you’ve paid NI. It’s down to you or HMRC to spot an overpayment. While HMRC has improved its procedures in recent years, we know that overpayments continue to slip through the net.
Spotting an overpayment
Where in a tax year you’ve had two or more jobs at the same time on which you’ve paid NI and your total earnings exceed the NI upper limit (which is £866 per week for 2017/18), it’s inevitable that you will have overpaid NI. Note. In some situations, e.g. for director’s earnings and profit from self-employment, HMRC looks at the annual equivalent of the upper limit, i.e. £45,000 for 2017/18. NI upper limits for earlier years are on HMRC’s website.
Reclaiming overpaid NI
If you’ve overpaid NI because you’ve had two or more jobs, there’s no time limit for claiming a refund. But for other types of overpayment, e.g. where you’ve paid NI on income for which it wasn’t due, the time limit is six years. To receive a refund you need to send a letter to HMRC’s NI office which must include certain information.
Tip. To avoid overpaying in the first place you can use a procedure known as NI deferment. It’s simple to apply for, but must be done within strict time limits which vary depending on which type (class) of NI you want to defer. The effect of deferment is that HMRC will suspend NI contributions on one or more of your jobs and after the end of the tax year work out anything you owe, in effect deferring when you have to pay it.
Happy tax saving!