Employer's National Insurance Contributions

The Hidden Cost:
Employer's National Insurance Contributions

When you employ somebody in your business, the wage or salary is a tax deductible expense.

Your employees will pay Income Tax and National Insurance but it is your responsibility, as HMRC’s unofficial tax collector, to deduct it from their pay correctly and pay it over once a month.

At this point you may also incur additional professional fees to have a monthly payroll run. This cost is also tax deductible, as you would expect.

Another much more significant cost is employer’s National Insurance which can be much higher than the National Insurance paid by the employees themselves.

We call this the ‘hidden cost’ because many employees and budding entrepreneurs do not realise how much National Insurance is paid by employers!

Employees currently pay National Insurance at the following rates on their earnings:

• First £7,605: 0%
• Next £34,870: 12%
• Over £42,475: 2%

Employers pay 13.8% on every pound the employee earns over £7,488. There is no cap.

 

Example
Eric employs an assistant and pays them £20,000 per year. He has to pay £1,727 in employer’s National Insurance:

£20,000 - £7,488 = £12,512 x 13.8% = £1,727

This increases the cost of employing his assistant by almost 9%.

Employer’s National Insurance is Tax Deductible

Fortunately, employer’s National Insurance is a tax deductible expense for the business. For self-employed business owners this means the employer’s National Insurance that they pay will reduce their own tax bills.

 

Example continued
Eric is a higher-rate taxpayer. The £1,727 he pays in employer’s National Insurance is a tax deductible expense and will reduce his own tax bill by £725 (£1,727 x 42%), so the true cost is only £1,002.

 

National Insurance Holiday

New businesses in certain parts of the UK can enjoy an employer’s National Insurance holiday worth up to £5,000 per employee for the first ten employees they hire in their first year of business.

The holiday lasts for 52 weeks once the employee has been taken on.

The scheme is open to new businesses set up after 21st June 2010 but only runs until 5th September 2013.

You can apply for the National Insurance holiday if your principal place of business is located in the following countries and regions:

• Northern Ireland
• Scotland
• Wales
• East Midlands
• North East
• North West
• South West
• West Midlands
• Yorkshire and Humber

The National Insurance holiday does not apply to businesses in London, the South East and East Anglia.