Personal taxation

National Insurance contributions (NIC) are compulsory contributions to the State system.

An extensive range of State benefits are available and although some will be paid regardless of the amount of con...

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National Insurance Contributions are split into 4 different categories relating to an individual’s employment status.&nb...

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We shall now look at each of the classes in more detail.

Class 1: Directors and employees

For the purposes of NICs, it is important to distinguish between employed and self-employed status. An employed status is generally indicated when:

There is a contract of service rather than a contract to provide services

There is a substantial amount of control over when and how the work is done

The work done is an integral part of the business

Employers need to take care where workers claim to be self-employed, because an error in the definition of the status can result in the employer being made to pay employer and employee NICs for past periods.

Class 1 NICs are paid by both an employee and their employer. The employee’s contribution is known as the primary contribution and the employer’s as the secondary contribution.

Although we have stated that class 1 NICs are paid in relation to the employee’s earnings, it is important to realise that this includes more than just basic wages or salary. Many other payments that an employee may receive from their employment can also be liable for NICs; they are as follows:

Bonuses, overtime and holiday pay

Incentive payments made for the acceptance of changes to the terms ...

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Religious ministers

Some categories of workers in the film and TV industries

Sub-contractors providing labour only services

Some freelance workers in the film and television industries are treated by HMRC as self-employed.

Married women

Prior to 6 April 1977, married women and some widows were able to elect to pay a reduced rate of NICs, and some of these are still in force (although they can be revoked). This election reduced the entitlement to certain State benefits (e.g. the new State pension).

Even where an election has been made, it will no longer be effective if there has been a divorce or annulment to the marriage, a remarriage or two complete consecutive years with no earnings above the LEL and no self-employed earnings.

Class 1A contributions

Most benefits in kind that an employee could receive are liable for employer’s contributions only.

Where the benefit is considered part of earnings for the calculation of class 1 NICs, they will not also be charged to class 1A NICs. Non-taxable benefits, such as contributions to approved pension schemes, are free from liability for NICs.

Class 1A NICs are paid at a single rate.

Class 2 contributions: Self-employed people

Class 2 NICs are paid by the self-employed between the ages of 16 and State pension age, who are normally resident in the UK or have resided in the UK for 26 out of th...

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Class 3 – Voluntary contributions

Class 3 NICs are voluntary contributions that can be made to fill  gaps in an individual’s contribution record or to increase entitlement to State pension...

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Class 4 contributions: Self-employed people

Class 4 NICs are also paid by the self-employed but not by anyone who is under 16 or over State pension age at the start of the tax year of assessment.

Class 4 NICs are earnings-related and are charged on taxable profits, that is, the profits chargeable to income tax, above a lower stated limit each tax year. Note that although pension contributions and other personal reliefs can reduce the amount of income tax paid, these are not deducted when calculating NICs.

The payment of class 4 NICs does not improve entitlement to any State benefits.

There is a ‘main rate’ charged from the s...

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Having now clarified who is liable for each of the different classes of NICs we will look at the different rates in the next section.

Sandra, aged 62, has continued working for her employer after the normal retirement age. What class or classes of National Insurance contribution will be paid on her earnings?

Answer: Only class 1 secondary contributions, paid by Sandra’s employer.

The rates of National Insurance contributions are set at the start of each tax year.

You can see the rates for the current year in the tax tables .

As we already established, the rates for class 2 and 3 are at a flat weekly rate, while class 4 is paid at two set percentage rates depending on the amount of taxable profits.

The sit...

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State the current amount of the employer allowance and who it is not available to.

Answer: There is currently an annual allowance of £3,000 per year. This is not available to companies where the director is the only employee.

In this section we will look at the calculation of NICs , combinations of different classes and the maximum amounts that can be paid.

We will start with class 1 NICs.

CLASS 1

In the workbook you can see these example calculations:

Employee

Employer

Director who is not paid on a weekly or monthly basis

Associated employments

There can be situations where an employee has earnings from more than one employment and the situation again is slightly different here.

The contributions threshold and UEL are normally applied to the earnings from each employment in isolation. However, if, for example, someone had three different jobs, each paying a weekly amount below the PCT, they would pay no National Insurance contributions, even though their combined earnings would bring them up to a...

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Class 3

As this is a flat-rate weekly payment like class 2 contributions, it is not necessary to look at a specific calculation example.

We have now looked at the calculations of the different classes in isolation. However, it is possible for someone to be liable for a combination of class 1, 2 and 4 NICs, depending on their employment status over the tax year. In this situation, maximum limits are set on the main rate each year, to prevent excessive amounts being paid. We will look at this in the next section.

Diane has more than one job. What can she do to ensure she won’t pay more than the maximum amount of National Insurance contributions?

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Where an individual is both employed and self-employed within a tax year, there are special provisions in place to set a maximum on the amount of NICs they will pay. However, these maximum limits only relate to NICs due at the main rate, that is, earnings falling between the PCT and UEL. There is no restriction on the amount of additional contribution that will be paid on earnings above the UEL and it does not enter into the maximum limit calculation.

Where the maximum main rate has been paid, the additional rate is payable on earnings from each employment that exceed the weekly PCT for employees and annual threshold for the self-employed.

You can see the annual maximum figures for the different combinations of NIC classes in the tax tables.

This is a complex area, because some employees are paid weekly or fortnightly.

There are only 52 weeks in a year, but even in a non-leap year, there is the pote...

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During the course of a tax year, it may be difficult to assess whether or not the limits for class 2 or class 4 will be exceeded. To avoid paying more than is necessary, an application can be made to NICO for a deferment of contributions at class 2, class 4 or both. At the end of the tax year, any shortfall can then be paid. Where a deferment is granted however, the additional rate class 1 or class 4 will still be payable on all earnings above the thresholds.

We have now covered calculations of National Insurance contributions both in isolation and where the different classes are combined, including the annual maximums. Having fully covered the range of potential calculations, the next section covers how the contributions are actually paid or collected.

Where annual maximum amounts have been paid, the additional rate is paid on what amount of earnings?

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National Insurance contributions are paid in different ways.

Class 1

Class 1 is normally collected through the PAYE system along with income tax. The employer calculates the amounts due on the employee’s earnings and deducts the amount before the employee receives their wages or salary. Along with their own contributions, the employer then pays the appropriate amount to NICO on a monthly basis.

Employers have to show each employee’s National Insurance contributions through real time submissions throughout the year and the total ...

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Class 4

Payment of class 4 NICs are collected through the self-assessment process. This means that they will be paid as part of the payments on account system, with the first payment on 31 January in the year of assessment, the second on 31 July following the end of the tax year of assessment and the final payment on 31 January in the following tax year. Where payments are late, interest will be charged.

Explain how class 1A NICs are collected

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There are a number of circumstances where an individual’s payment record will be credited with the minimu...

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This aims to ensure that any entitlement to benefits is maintained.

The situations we have examined in this chapter relate purely to earnings within the UK. Where an employee or employer has overseas connections, the Overseas Branch of NICO should be consulted for any special rules that may apply.

The European Economic Area (EEA) has regulations for the 27 member states of the EU together with Norway, Iceland and Liechtenstein, with a basic principle that employees who are EEA nationals should only pay contributions towards State benefits in one country, which is normally the country where they work. This is the case even if they live in another EEA country and the employer is also based elsewhere within th...

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Self-employed individuals pay reduced rates of NICs on their earnings, but they have a lower entitlement to State benefits, so although a switch to self-employment may result in a saving on NICs, it also has an impact on pension planning.

Mark works for a UK company but has been sent to Germany to work for the next 6 months. How will his National Insurance contributions be collected?

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