There are hundreds of different rules governing tax and national insurance contributions and even I find it a struggle to remember the changes year on year.

Given that individual circumstances can be just as complicated it is difficult to illustrate how the combined tax and NIC rules reduce gross income. But below, I have illustrated the simplest situation for the self employed and employee in 2008/09 and 2009/10.

In both instances I have taken a person receiving income evenly throughout the year with a basic personal allowance and no employee benefits or pension contributions.

Across the two years the percentage rates are unchanged (changing in 2010/11):

  • Tax (0%, 20% and 40%)
  • Self employed national insurance (0%, 8% and 1%)
  • Employee national insurance (0%, 11% and 1%)

When combined they produce a maximum rate of 41% via four or five steps as illustrated. As things are changing I have highlighted the increased rates for 2010/11 at the end of the article.

The self employed in 2008/09

Earned income bracket Rate
From (£) To (£)
0 5,435 0%
5,436 6,035 8%
6,036 40,040 28%
40,041 40,835 21%
40,836+   41%

In addition the annual Class 2 NIC liability will be £120 (i.e. 52 weeks at £2.30).

The self employed in 2009/10

Earned income bracket Rate
From (£) To (£)
0 5,715 0%
5,716 6,475 8%
6,476 43,875 28%
43,876+   41%

In addition the annual Class 2 NIC liability will be £125 (i.e. 52 weeks at £2.40).

The employed in 2008/09

Earned income bracket Rate
From (£) To (£)
0 5,435 0%
5,436 6,035 11%
6,036 40,040 31%
40,041 40,835 21%
40,836+   41%

The employed in 2009/10

Earned income bracket Rate
From (£) To (£)
0 5,715 0%
5,716 6,475 11%
6,476 43,875 31%
43,876+   41%

NIC and tax increases in 2010/11

For the very wealthy the personal allowance will be tapered to zero for those earning in excess of £100,000 and a 50% rate of income tax and restricted pension contribution rate applied on earnings over £150,000.

NIC and tax increases in 2011/12

In the pipeline is some bad news as the self employed and employee will pay an extra 0.5% NIC on all earnings above the personal allowance. This is equal to an extra £50 for every £10,000 above the personal allowance of say £6,800.

In addition, the employer class 1 rate is also increasing by 0.5% making it more expensive employing staff.

copyright ©2009

This article is for discussion purposes only and does not represent advice on which you should act without consulting a professional as tax legislation is complex and changes frequently.

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