New NIC Thresholds

The NIC rates and thresholds had been announced in advance of the Budget on 11 March to allow time for software providers to programme this information into their payroll packages for 2020-21.

There is no change to the rates of Class 1 NIC as the Conservative Party pledged not to increase the rates of income tax, NIC or VAT. However, the weekly amounts of Class 2 and Class 3 NIC will increase to £3.05 and £15.30 respectively.

Class 1 NIC Thresholds 2020-21

Pay Period Monthly Pay Period Annual
Lower Earnings Limit Class 1 £520 £6,240
Small Earnings Threshold Class 2 £6,475
Employee Class 1 and Class 4 £792 £9,500
Employer Class 1 £732 £8,788
Upper Earnings Limit Class 1 and Class 4 £4,167 £50,000

The 40% threshold will remain at £50,000 and the personal allowance will remain at £12,500. Different income tax thresholds have already been announced for Scottish residents.

A director who wishes to take a salary from their company without paying NIC should be aware that the company will pay Class 1 NIC at 13.8% on their salary above £732 per month (£8,788 per year) although the director will not pay employee’s Class 1 NIC until their salary reaches £9,500 pa. If the company qualifies for the employment allowance (see below) up to £3,000 of employer’s Class 1 NIC is covered by that allowance and is deducted from the total NIC bill payable to HMRC.

A director who is also a shareholder of their company will often extract further cash as dividends using the £2,000 dividend allowance and the lower dividend tax rates of 7.5% and 32.5% to minimise their tax bill.