Week 5

• National Insurance contributions (NICs) are the UK’s second-biggest tax, expected to raise almost £150 billion in 2021 to 22 – about 20% of all tax revenue.​

  They are paid by employees and the self-employed on their earnings, and by employers on the earnings of those they employ
• Unlike income tax, NICs are not charged on income from other sources such as savings, pensions or property. Payment of NICs qualifies individuals to receive certain social security benefits (most notably the state pension). ​
• In practice, however, the link between contributions paid and benefits received is vanishingly weak and NICs essentially act as a second income tax
• The majority of NICs revenue – an estimated 58% in 2021–22 –comes from employer contributions. ​Employee contributions provide a further 39%. Contributions made by the self-employed​ (comprising both Class 2 and ​Class 4 contributions) are​ a relatively small source ​

  of revenue, accounting for less ​than 2.5% of contributions. ​That reflects a combination ​of the much smaller numbers ​of self-employed people, ​their lower average earnings ​and the lower NICs charged​

   on their earnings.​
• NI contributions are used to fund the current​ social security system in the UK.​
• NI

   Related to employers and employees (class 1)​

  • Related to self employed (class 2 and 4)​
  • Voluntarily paid (class 3)​
• • Class 1 – Employees (Primary)

    Employers (Secondary)​
• • Class 1A – Employers on benefits in kind paid to employees​

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• Class 1 NICs are payable in relation to employees aged 16 and over​

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  Employees who continue to work after reaching state pension age pay no further primary contributions, but employers continue to pay secondary contributions​
• Class 1 NICs are calculated on gross pay before deducting pension contributions, donations under a payroll giving scheme or any other expenses borne by the employee​

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• Class 1 NICs are calculated in relation to a "contribution period"​

  • A contribution period is the period for which the employee is being paid (e.g. weekly or monthly)​
  • NICs are calculated on a non-cumulative basis, so only the earnings in the current contribution period are considered when calculating the amount payable​
  • For employees each job is treated separately for NICs purposes​
  • But NICs for company directors are always assessed on an annual basis​
• Employers are not required to pay secondary Class 1 contributions on earnings up to the upper secondary threshold (£967 per week) for employees under the age of 21 or apprentices under the age of 25.​

  ​Employers may deduct an "employment allowance" of up to £5,000 per annum from their secondary Class 1 NICs liability​
• The employment allowance is not available:​

  -To companies where a director is the sole employee.​

  -Where employers’ contributions are £100,000 or more for the previous tax year.​
• In 2023-24 self-employed individuals with profits £12,570 or more a year usually pay Class 2 and Class 4 National Insurance rates.​
• Class 2 NICs are collected through the Self Assessment system along with income tax and Class 4 NICs (but POAs are not required for Class 2 contributions)​
• 1. A self-employed person whose profit for the tax year is less than the "small profits threshold" (£6,725 for 2023-24) is not required to pay Class 2 NICs for that year but may do so voluntarily so as to maintain a Class 2 contributions record.​
• 1. A self-employed person whose profit for the tax year is not less than £6,725 (the small profits threshold) but is less than the £12,570 (lower profits threshold) is not required to pay Class 2 NICs. But such a person is treated as if he or she had in fact paid Class 2 NICs for the year, thus maintaining a Class 2 contributions record. ​
• Benefits in kind are generally exempt from both primary and secondary Class 1 NICs​

  Therefore employees pay no NICs at all in relation to benefits in kind they receive from their employers​

  However, employers must pay Class 1A contributions on taxable benefits in kind​

  For 2023/24, Class 1A contributions are calculated at 13.8% of the taxable benefit.​

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• Class 3 ​

  Voluntary – Weekly flat rate of £17.45 in 2023/24​

  Buying voluntary Class 3 National Insurance contributions can help you top up your state pension if you have gaps in your record.​

  ​You may have gaps or part years in your National Insurance (NI) record due to a number of reasons – you may have been employed on low earnings or unemployed but not claiming benefits. ​

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• • An individual who has more than one employment will normally be required to make Class 1 contributions in respect of each employment​
• • An individual who is both employed and self-employed will normally be required to make Class 1, Class 2 and Class 4 contributions​
• • To ensure that the amounts of NICs payable by such individuals are not excessive, there are limits on the total contributions that can be required in any one year​
• • The calculation of these annual maximum contributions is complex and varies according to each individual's circumstances​

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• • Primary Class 1 NICs are payable by employees, Secondary Class 1 NICs are payable by their employers.​
• • Primary Class 1 NICs are payable at 12% on earnings lying between primary threshold and upper earnings limit. Above upper earnings limit payable at 2%.​
• • Secondary Class 1 NICs are payable at 13.8% on earnings beyond secondary threshold.​
• • Class 1A NICs are payable by employers in relation to benefit in kinds which are not convertible into cash and which are chargeable to income tax.​
• • Class 2 and 4 NIC are paid by people who are self employed   ​

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