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National insurance planning

National insurance planning

Obligations and opportunities.

National insurance contributions (NICs) are set aside to pay the state pension and other benefits, but due to the UK’s ageing population the National Insurance Fund is under increasing strain, with the state pension taking up more than 90% of its annual outlay in 2018.

A review by the Government Actuary’s Department (GAD) predicted the fund would be empty by around 2032.

There is no pot of money set aside to pay future state pensions, which are funded on a pay-as-you-go basis, which means that future pensioners are reliant on the NICs of future workers to pay their pensions.

On its website, the GAD said: “If the system is to continue to cover the current form of state pension and other benefits, then either the fund’s income has to rise or expenditure has to be controlled”.

Although the Treasury can top up the fund through a grant, restrictions on the level of grant the Treasury can make mean this will not be enough to stop the fund from running down. The most likely alternative therefore is an increase in NICs.

Employers, employees and the self-employed are required to pay NICs on relevant earnings or proits above a set threshold. Class 1 contributions, which are paid by employers and employees, made up 96% of the total contributions to the fund in 2015/16.

Changes in NICs have proved politically sensitive in recent years. The Government has looked at increasing the contribution made by the self-employed through changes to class 4 and class 2 NICs to shift some of this burden.

It has also withdrawn increases to class 4 NICs and shelved the proposed changes to abolish class 2 NICs, so that the weight of NICs continues to fall more heavily on the employed.

All rates and percentages stated in this article relate to 2018/19 tax year.

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