Freelancer’s Question: I am self-employed and only earn about £25,000 a year. What do the newly announced national insurance rates and thresholds mean? Should I put another £5,000 into a pension to reduce earnings and therefore my NI liability?
Expert’s Answer: As you are self employed, National Insurance is calculated using your net profit. Unfortunately this means that you liable for the full increase in NI that was announced in the pre-Budget report in December on all of your £25,000 income.
If you were to contribute an extra £5,000 to your pension then you would still
benefit from full income tax relief on that contribution, but your NI liability would remain the same. Unfortunately the only way to lower your NI costs is via a salary sacrifice arrangement, but this is only available to individuals operating via a PAYE umbrella company, or a one-person limited company.
Pensions investment does still represent one of the few remaining tax breaks for the self-employed. So if you can afford to contribute the extra £5,000 into a pension, this would still represent a very tax efficient method of taking money from contract into personal hands. With the increasing focus on personal provision for retirement, this investment would also offer an opportunity to have a lasting legacy for your hard work from self-employment as it would help you to build a nest egg for your later years.
The expert was Tony Harris, founder and managing director of Freelancer Money, an independent financial advisor to freelancers and the self-employed.
Jan 4, 2010
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