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 indiv...

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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

The individual works set hours, gets holiday pay and overtime pay, and is supervised

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

Work isn’t capable of being sub-contracted

A long engagement of working for the same person

The work done is an integral part of the business

The individual does not risk any of their own money

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 contribution is known as the secondary contribution.

Although we have stated that ...

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There are also certain categories of occupation, listed below, where individuals are treated as employees and therefore liable for class 1 NICs, even if they are treated otherwise for income tax.

Office cleaners and domestic workers

Those who obtain temporary work through agencies

Some lecturers and instructors

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.

Class 1A contributions

Most benefits in kind that an employee could receive are liable for employer’s contributions only. Examples include company cars and private medical insurance.

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. Trivial benefits costing £50 or less are free of NICs.

Class 1A NICs are paid at a single rate.

Class 2 contributions: Self-employed people

Class 2 NICs are paid at...

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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 a...

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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...

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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 class 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 ...

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

Answer: There is currently an annual allowance of £5,000 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.

The Primary Threshold (PT) and Upper Earnings Limit (UEL) are normally applied to the earnings from each employment in isolation. However, if, for example, someone had three different ...

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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 PT 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.

The maximum contributions limit means that clas...

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However, a simplified explanation is given here with an annual basis of 52 weeks being used and annual figures (rounded with no pennies). This is the basis that will be used for any calculations in the CII exam.

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 t...

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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 individua...

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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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Chapter revision test Your results and 2.6 hours of estimated study time will be added to your CPD certificate on completion. If you retake the test then additional CPD time for the test will be added.

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