:: National Insurance ::

52 Ways to Save Tax #30

Pay less tax

Pay less tax

Childcare vouchers allow you to pay for your childcare from your pre-tax salary. If you pay for childcare, you could save hundreds of pounds a year by using the voucher scheme.

In the latest part of our “52 Ways to Save Tax” guide, we look at how you reduce the amount of tax that you pay by using childcare vouchers.

52 Ways to Save Tax – Part 30: Use childcare vouchers

If you have children aged up to 15, you could save over £1,000 each year by using childcare vouchers. While they are only available through employers, they let you pay for childcare out of your pre-tax and National Insurance (NI) income.

This may not sound like a big deal, but it could save you hundreds of pounds.

The process works on ‘salary sacrifice’. Here’s an example:

  • You give up £1,000 of salary which, after tax and National Insurance is only worth around £700 to you if you’re a basic rate tax payer
  • In return for giving up £1,000 of salary, you get £1,000 worth of childcare vouchers
  • By taking the vouchers you are £300 better off

If you’re a basic rate taxpayer, you can pay for up to £243 of childcare each month with vouchers (£55 per week). This is per parent, and so if you are both working you can get £486 of childcare vouchers each month.

The limit to the amount of vouchers you can buy is:

  • Basic rate (20%) taxpayer – £55/week, maximum annual tax/NI saving £930
  • Higher rate (40%) taxpayer – £28/week, maximum annual tax/NI saving £630
  • Top rate (45%) taxpayer – £25/week, maximum annual tax/NI saving £590

Remember that these limits are per parent. And, the number of children you have doesn’t affect the amount of childcare vouchers that you can buy. If the vouchers don’t cover the cost of childcare, you pay the childminder directly for the difference.

Vouchers are typically non-refundable, so don’t buy more than you need. However, they do normally last for a long time and so you can save them up to use during holiday times when the cost of childcare may be greater. Many providers will also allow you to backdate vouchers although your child must be born for you to be able to sign up.

You can use vouchers to pay for childcare up to 1 September after your child’s 15th birthday (16th birthday if they are disabled). The vouchers can be used at any nursery, nanny, childminder or playgroup who is Ofsted registered.

You can also use vouchers to pay for tuition for your child, as the tutor is providing ‘childcare’ at the same time. The tutor must be Ofsted registered and happy to accept vouchers.

Do you pay more of your income in tax than ever before?

At what point in your life were you paying the highest proportion of your income in tax? In the 1970s? The 1980s? In a recession? Or now?

Since the 1960s, the Office of National Statistics has analysed how much of your income you are paying in taxes. And, this analysis is not just looking at your income tax. Research has considered the impact of both direct taxes and indirect taxes on household incomes.

  • Direct taxes include: Income tax, National Insurance contributions, Capital Gains tax, Inheritance tax
  • Indirect taxes include VAT, fuel duty, tax on alcohol and tobacco, Stamp Duty

The graph below shows the ‘effective’ tax rate over the last 50 years. The ‘effective’ tax rate is the total amount paid by households in both direct and indirect taxes as a percentage of their gross income.
Effective tax rate

In 1961, after accounting for inflation, the average household paid approximately £4,000 in direct and indirect taxes, compared with £12,900 in 2011/12.

Why you’ve paid a different proportion of your income in tax since the 1960s

Since the 1970s, the general pattern of change in headline rates of tax has been for reductions in income tax, and increasing Employee’s National Insurance contributions and VAT. However, many other factors, including the income levels at which income tax and National Insurance contributions are levied, as well as changing working patterns, household compositions and demographics, have also had substantial influence on how these taxes have affected average household incomes.

The effective tax rate grew during the 1960s and 1970s from 28.4 per cent in 1961 to a peak of 39.4 per cent in 1983. However, since then the trend has been downward, reaching a low of 32.8 per cent in 2009/10, before increasing slightly over the last two years to 34.6 per cent. This means that the average household in the UK now pays just over a third of their gross income in direct and indirect taxes.

These figures do, however, hide another important fact: namely that the richest and poorest households in the UK are paying almost exactly the same proportion of their gross income in taxes. The most recent figures reveal that the poorest households pay 36.6 per cent of their income in taxes compared to the richest households who pay 35.5 per cent.

So, if you have been paying taxes for years then you were contributing a higher percentage of your income in 1983 than at any other time. But, the figure is gradually creeping up again. So, is the amount of tax you pay fair? Should richer households pay a higher proportion of their income in taxes than poorer households? Please share your thoughts below.

How To Get A National Insurance Number

If you want to work or claim benefits in the UK then you will need to have a National Insurance number (NINO).

Most people receive their National Insurance number automatically just before their 16th birthday.  However, if you don’t have a National Insurance number, you may need to get one.  Our guide explains what your National Insurance number is, when you should receive one automatically and how to get a National Insurance number if you don’t have one.

What is a National Insurance number?

Your National Insurance number is a number that is unique to you.  It is used to keep track of your benefits and any national insurance contributions that you pay. The number is made up of two letters, six numbers and one letter – for example PF832459B.

If you start a job or you claim a benefit or tax credits, you’ll need to supply your National Insurance number. If you think you have a National Insurance number, but you are not sure what it is, you may find it on your payslip, benefits letter or your P60 form.

You can ask for help in finding your number from your nearest benefits office or HM Revenue and Customs (National Insurance Contributions Office). You can also ring the National Insurance Registrations Helpline on 0845 915 7006.

Getting a National Insurance Number automatically

If you’re under 16, living in the UK and your parent gets Child Benefit for you, you will automatically be registered for National Insurance.  You’ll get your National Insurance number through the post just before your 16th birthday. If you don’t get your number automatically, you can contact the National Insurance Registrations Helpline on 0845 915 7006 for advice.

While you don’t have a legal right to a National Insurance number, you are legally obliged to apply for one if you start work, or if you (or your partner) claim benefit.

How to get a National Insurance Number if you don’t have one

If you do not have a National Insurance number and you need one, you should telephone the National Employment NINO application number on 0845 600 0643 to arrange an interview at a local office.

The meeting will look to establish your identity and you will need to prove who you are. You can do this by taking along original copies of your birth certificate, driving licence or national identity card and letters from the Home Office.

At the meeting, you will also be expected to provide evidence to prove you have a right to work in the UK. If you don’t have the right to work in the UK, you won’t be entitled to a National Insurance number.

What if you have lost your National Insurance number?

If you can’t find your National Insurance number, you should contact HM Revenue and Customs.  Remember that you may find it on your payslip, tax forms or on your benefits or tax credits award letter.

You may also have a National Insurance Card with your number, but as from 2010, replacement National Insurance cards will no longer be issued.

How You Get A National Insurance Number

If you’re working in the UK or you need to claim benefits or tax credits then you’ll need a National Insurance (NI) number.

Most people receive a National Insurance number automatically.  However, there may be cases where you have to apply for a number.  Keep reading to find out more about your National Insurance number in addition to recent changes to the National Insurance card system.

What is your National Insurance number?

Your National Insurance number is unique to you.  You keep the same number all your life and it ensures that any tax and National Insurance contributions that you pay are correctly allocated to you.

Getting a National Insurance Number automatically

You will automatically be sent a National Insurance number just before your 16th birthday if you live in the UK and your parents/guardians are receiving Child Benefit for you.

Previously, you would have been sent a National Insurance card.  However, the Government have announced that cards will no longer be issued and you will receive your National Insurance number through the post.

How to apply for a National Insurance Number if you don’t have one

If you’re between 16 and 20 years old and haven’t received a National Insurance number, you should contact the National Insurance Registrations Helpline on 0845 915 7006 for advice.

If you don’t already have a National Insurance number you must apply for one if:

  • You want to claim benefits and/or tax credits
  • You are starting work or you are setting up your own business and you have the right to work in the UK

When you apply for a National Insurance number, Jobcentre Plus will arrange an ‘Evidence of identity’ interview for you or send you a postal application.  Your ‘Evidence of identity’ interview will normally be on a one to one basis and you will be asked about why you need a National Insurance number and for some details about your circumstances and background.  You will also have to prove your identity via a valid passport, national identity card, a birth certificate or a driving licence.

During the interview a National Insurance number application form will be completed and you will be asked to sign it.

Receiving your National Insurance number

If your application is agreed by Jobcentre Plus you will be sent confirmation of your National Insurance number by post.  As mentioned above, you will no longer receive a National Insurance card.  However, it’s important to keep the letter confirming your NI number as you may need to refer to this in the future.

If relevant, you should tell your employer your National Insurance number as soon as you know it.

What if you have lost your National Insurance number?

If you can’t find your letter or National Insurance card, you may be able to find your National Insurance number on other official paperwork such as your payslip, your P60 or your PAYE Coding Notice.  If you still can’t find it you should contact HM Revenue and Customs.

As from 2010, replacement National Insurance cards will no longer be issued.

How Much Can I Earn Before Paying Tax in 2011?

Most people in the UK are entitled to earn some income every year before they have to pay tax.  This is called your Personal Allowance.  Depending on your circumstances you may also be able to claim some other tax allowances.

Our guide looks at how much you can earn before paying tax in 2011.  We also look at how much you can earn before you pay any National Insurance contributions.

How much can I earn before paying tax 2011?

The amount of your tax free Personal Allowance depends on your age and your total income in the last tax year.

The basic personal allowance for people aged under 65 and who earn under £100,000 in the 2011/12 tax year is £7,475.  This means you can earn £7,475 before you pay tax.

If you are aged 65 to 74 and you earn under £24,000 your Personal Allowance is £9,940.

If you are aged 75 or over and you earn under £24,000 your Personal Allowance is £10,090.

If your income is over the limit (either £100,000 or £24,000 depending on your age) your Personal Allowance is reduced by half of the amount – £1 for every £2 – you have over that limit.

Other allowances that might increase the amount you can earn before paying tax in 2011

If you’re certified blind and are on a local authority register of blind persons you can claim Blind Person’s Allowance.  Blind Person’s Allowance for the tax year 2011/12 is £1,980.  This means that if you also qualify for the full Personal Allowance, you can earn £9,455 in the 2011/12 tax year before you pay tax.

If you are married or in a civil partnership and living together, you are a taxpayer and at least one spouse or partner was born before 6 April 1935 then you can claim Married Couple’s Allowance. In the 2011/12 tax year the maximum amount of Married Couple’s Allowance is £7,295 and the minimum amount is £2,800.

You receive ten per cent of the allowance amount – which means your annual tax saving is at least £280 and could be up to £729.50. The actual amount depends on your income.

How much can I earn before paying National Insurance contributions in 2011?

If you’re employed you pay Class 1 National Insurance contributions (NICs).  In the 2011/12 tax year you won’t pay any NICs if you earn less than £139 per week.

If your average earnings are over £139 per week you won’t necessarily pay NICs every week.  You only pay NICs in the weeks where your earnings exceed £139.

If you’re self-employed you pay Class 2 and Class 4 National Insurance contributions.  IN the 2011/12 tax year you won’t pay any Class 4 NICs if your profits are under £7,225.  In addition, you may not pay any Class 2 NICs (normally a flat rate of £2.50 per week) if your profits are expected to be under £5,315.

Finding Your Important Tax Information

When submitting your tax return, starting a new job or enquiring about your tax and other benefits you’re likely to need certain pieces of information.  These may include your National Insurance number, your Unique Taxpayer Reference (UTR) number or your tax code.

If you’ve mislaid any of this information, our guide will help you find it.

Finding your National Insurance Number

If you can’t remember your National Insurance number or you’ve lost your National Insurance number card, you may be able to find it on some of your official paperwork.  You can often find your National Insurance number on:

  • Your payslip
  • A copy of your Self Assessment tax return
  • Your P60 (end of year tax statement)

If you still can’t find your National Insurance number, you can ask HM Revenue and Customs (HMRC) to confirm it to you.  You can do this by calling the National Insurance Registrations Helpline (on 0845 915 7006) or completing and returning a CA5403 form.

HMRC will confirm your National Insurance number by post.

Finding your Tax Code

If you’re employed or between jobs, you’ll find your tax code on your P45 (the statement of earnings/tax you receive when you leave an employer).  You will also find your tax code on your ‘PAYE Coding Notice’, usually sent to you by HMRC before the start of each tax year.

If you’ve lost your P45 and want to find out your tax code you should contact HMRC and give them your National Insurance number and tax reference number (see below).

If you’re starting your first job, your employer will ask you for the relevant information to allocate a tax code and work out the tax due on your wages.  HMRC will then process the information passed on from your employer and, where necessary, revise or issue you with a tax code.

If you get a company or personal pension, you’ll find your tax code on your PAYE Coding Notice.  You’ll also find your tax code on notices and payslips from your pension provider.

Finding your Unique Taxpayer Reference (UTR) Number

Your UTR number is a unique number provided by HMRC so that you can complete your tax return.  It has ten digits (for example, 15863 35637) and it is used by HMRC to identify you.

If you can’t remember what your UTR number is, you can normally find it on:

  • Your tax return – your UTR number should be on your tax return
  • Your ‘Welcome to Self Assessment’ letter (SA250). This letter also explains how your UTR number is used
  • Your ‘Notice to File a Tax Return’ – if you submit your tax return online, you should receive a reminder that your self assessment tax return is due.  Your UTR number will be found on this Notice to File document
  • Your ‘Statement of Account’ – your UTR will also appear on your HMRC statement

You will often also find your UTR number on other formal correspondence that you receive from HMRC such as a payment reminder.

How Much Tax Do I Pay?

As Benjamin Franklin once famously remarked: “In this world nothing can be said to be certain, except death and taxes.”  We pay tax on everything from our income to our home and our groceries and so our guide looks at how much tax you can expect to pay.

Income Tax

There are several different tax bands and rates depending on your income.  The question “How much tax do I pay?” will therefore depend very much on your specific personal circumstances such as the tax allowances that you are eligible for and where your income comes from.

Typically, you’ll pay the following tax in the 2011/12 tax year:

  • 0% on the first £7,475 that you earn (this is your Personal Allowance)
  • 20% on the next £37,400 that you earn
  • 40% on the next £112,600 that you earn
  • 50% on anything over this

National Insurance Contributions

The amount of National Insurance contributions that you pay will depend on whether you are employed or self employed.

If you’re employed you pay Class 1 National Insurance contributions at the following rates:

  • if you earn more than £139 a week and up to £817 a week, you pay 12 per cent of the amount you earn between £139 and £817
  • if you earn more than £817 a week, you also pay 2 per cent of all your earnings over £817

If you’re self-employed you pay Class 2 and Class 4 National Insurance contributions at the following rates:

  • Class 2 National Insurance contributions are paid at a flat rate of £2.50 a week
  • Class 4 National Insurance contributions – you pay 9 per cent on any profits between £7,225 and £42,475, and a further 2 per cent on profits over that amount

VAT

Value Added Tax (VAT) is a tax that you pay when you buy certain goods or services.  Most goods and services in the UK are subject to VAT and the tax is payable at one of three rates:

  • Standard rate (20%) – Most goods and services attract VAT at this rate
  • Reduced rate (5%) – On certain goods such as children’s car seats and gas and electricity for your home
  • Zero rate (0%) – There are some goods on which you don’t pay any VAT such as most foodstuffs, books, children’s clothes, magazines and newspapers

Other Taxes

As well as these three main taxes there are other taxes that you may pay.  Again, the rates vary depending on your specific circumstances.

The main other taxes are:

  • Inheritance Tax (IHT) – Payable if your estate (including any assets held in trust and gifts made within seven years of death) is valued over the current Inheritance Tax threshold (£325,000 in 2011-12).  The tax is payable at 40%
  • Capital Gains Tax (CGT) – Payable on capital gains’ (any profit that you make when you sell or give away an asset if it has increased in value.  The tax is payable at 10%,18% or 28% depending on your circumstances
  • Road Tax – Payable if you want to take a vehicle on a public road.  The rate varies from £0 to over £1,000
  • Council Tax – Payable based on the value of your home.  The rate payable is determined by your local authority

How Much Is Tax?

You pay tax on everything from your income to your groceries.  However, everyone in the UK pays a slightly different amount of tax.

So, our guide looks at the three main types of tax that you pay and what the current tax rates are.

Income Tax

There are four rates of income tax in the UK: 0%, 20%, 40% and 50%.

The amount of tax that you pay depends on the personal allowances that you receive and the amount that you earn.

The vast majority of taxpayers are allowed to earn a certain amount each tax year without paying any tax (your ‘personal allowance’.  In the 2011/12 tax year, this amount is £7,475.  However, you may also receive other allowances based on your age, if you are married or if you are registered blind.

You then pay 20% tax on the next £35,000 of your earnings over your personal allowance, 40% of the next £150,000 and 50% of any amount above this.

National Insurance contributions

The amount of National Insurance contributions you pay depend on your earnings and whether you are employed or self-employed.

Employed

If you earn under £139 per week, you won’t pay any National Insurance contributions.  If you earn more than £139 a week and up to £817 a week, you pay 12 per cent of the amount you earn between £139 and £817.  If you earn more than £817 a week, you also pay 2 per cent of all your earnings over £817.

Self-employed

If you’re self-employed you pay Class 2 and Class 4 National Insurance contributions.

You pay class 2 National Insurance contributions at a flat rate of £2.50 a week (unless your profits are expected to be under £5,315 when you may not have to pay any contributions).

Class 4 National Insurance contributions are 9 per cent on profits between £7,225 and £42,475, and a further 2 per cent on profits over that amount.

Value Added Tax (VAT)

VAT (Value Added Tax) is a tax that you pay when you buy goods and services in the European Union, including the UK.

There are three main rates of VAT in the UK: 0%, 5% and 20%.

There are some items on which you pay 0% VAT, such as most food items, children’s clothes and books, magazines and newspapers.

A VAT rate of 5% is charged on some items such as home gas and electricity and car seats.

Most items that you buy will have VAT at 20%.

Are You Employed Or Self Employed For Tax Purposes?

The way that you pay tax and National Insurance depends on your employment status.  As well as determining how you pay your tax, whether you are employed or self-employed also affects your employment rights and what benefits you may be entitled to.

Our guide will help you work out whether you are employed or self-employed and how this may affect how you pay tax.

Are you employed or self-employed?

The easiest way to work out your employment status is to answer these questions:

You are probably employed if:

  • You have to do the work yourself
  • You have to work a fixed amount of hours
  • You are paid a set amount depending on the hours that you work
  • You get paid for working overtime
  • You are told when, where and how you do your work
  • You work for someone who is in charge of what you do

You are probably self-employed if:

  • You take responsibility for the success or failure of the business
  • You provide the equipment needed to do your work
  • You decide who to hire to help you with your work
  • You have a number of clients/customers simultaneously
  • You decide when, where and how you do your work

Sometimes you may be both employed and self-employed at the same time.  For example, you may work during the day and then run your own business from home in the evenings and at weekends.

Ultimately, whether you are employed or self-employed depends upon what your contract says and the facts of your working arrangements.  Sometimes the courts have to get involved to determine the basis of your employment; for example after a dispute about benefits.

Paying tax and National Insurance if you are self employed

If you are self employed, you are responsible for paying both tax and National Insurance contributions.  You have to let HM Revenue and Customs (HMRC) know that you are self employed – there are penalties if you don’t register as self employed – and you must fill in an annual Self Assessment tax return.

Paying tax and National Insurance if you are employed

If you work on an employed basis, it is your employer who is responsible for paying your tax and National Insurance contributions on your behalf.  They do this through the Pay as you Earn (PAYE) system.

If you are employed you are also entitled to a further range of benefits.  For example, you are entitled to sick pay, Jobseeker’s Allowance (if you lose your job), paternity and maternity leave and a State Pension when you retire.



4 Key Questions About Your National Insurance Number

Do you have a National Insurance number?

If you are aged over 16 and live in the UK you should have automatically received your National Insurance number just before your 16th birthday.  However, there may be situations where you don’t have a National Insurance number and you need one.  Our guide explains when you need a National Insurance number and how you go about getting one.

1. What is a National Insurance number?

Your National Insurance number is a number that is unique to you and that you keep for your entire life.  It ensures that the tax and National Insurance contributions that you pay are accurately recorded against your name and it provides a handy reference number when you have to contact HM Revenue and Customs.

2. Should I receive a National Insurance number automatically?

You should be sent a National Insurance number automatically just before your 16th birthday, assuming that:

  • You live in the UK
  • Your parents or guardians are receiving child benefit for you

If you are aged between 16 and 20 and you haven’t received a National Insurance number, you should contact the National Insurance Registrations Helpline on 0845 915 7006 for advice.

3. When should I apply for a National Insurance number?

If you do not already have a National Insurance number there are three main situations where you will need to apply for one:

  • If you need to claim benefits or tax credits
  • When you start work – you have to have a National Insurance number to start work whether you are employed or self-employed
  • If you have applied for a student loan

You may have to attend your local Jobcentre for an ‘Evidence of Identity’ interview to obtain a National Insurance number.

4. What if you lose or can’t remember your National Insurance number?

If you do have a National Insurance number but you can’t find your plastic card or you can’t remember your number, you could first try to find it on documents such as:

  • A payslip or P60
  • A copy of your tax return
  • Other letters or correspondence from HMRC or the Department of Work and Pensions

If you still can’t find your National Insurance number, you can ask HMRC to confirm it by:

  • completing and returning the form CA5403 called ‘Your National Insurance number’
  • contacting the National Insurance Registrations Helpline on 0845 915

HMRC are not allowed to confirm your National Insurance number by telephone. They will confirm your National Insurance number in writing to you.