2 - National Insurance Flashcards
National Insurance
Who do the four NI classes relate to?
- Class 1: Employee and employer
- Class 2: Self-employed (flat rate)
- Class 3: Voluntary
- Class 4: Self-employed (percentage rate)
National Insurance - Class 1
What is it paid on?
Which employees pay it?
Timing basis?
Paid on all salary/wages, bonuses and maternity/sick pay (NOT benefits).
Also paid on unapproved share option scheme shares (that can be converted into cash). Approved schemes are free of NIC.
Employees don’t have to pay after state pension age.
Based on your weekly/monthly earnings, not over the tax year (so you get screwed if you earn a lot in one month and nothing for the rest of the year).
National Insurance - Class 1
Three considerations for employers
- NIC contributions paid by the employer are tax deductible (considered part of the staff costs). Obviously employee contributions aren’t deductible because these are really paid by the employee.
- Employers get a £3k allowance deducted from their total secondary contributions. Doesn’t affect employee contributions at all, but encourages businesses to hire staff.
- Don’t pay any NICs for under 21s or apprentices up to the upper earnings limit of £866pw.
National Insurance - Class 1
How are employee and employer contributions calculated?
Calculate on a weekly/monthly basis. (Rates and thresholds are in tax tables).
- Primary contributions are paid by the employee, only on earnings above the primary threshold (£157 pw). Pay 12% between £157pw and £866pw (Upper Earnings Limit) and 2% above the UEL.
- Secondary contributions payable by employer on earnings above the secondary threshold (£157 pw). They pay 13.8% on everything above that level (no upper limit).
National Insurance - Class 1
Married women rules
Married women born before 1/4/77 could elect to pay reduced rates.
Effectively pay 5.85% between £157 and £866 pw instead of 12% (usual 2% above that).
Could get revoked if they divorce, re-marry, or in case of low earnings.
National Insurance - Class 1
If you leave the UK to work abroad what is your class 1 NIC requirement?
If your employer is in the UK (even if you are employed by them to work abroad) you will continue to have class 1 NICs for 52 weeks.
This can be avoided by changing your work contract so you are employed by a foreign company.
National Insurance - Class 1a
What are class 1a contributions, how much, who pays?
Class 1a contributions are paid by the employer on the value of benefits given to an employee.
Paid at a single rate of 13.8% (in tax tables).
National Insurance - Overseas issues
- Situation for EEA nationals
- Impact of arriving in the UK to work
- Impact of leaving the UK
- EU rules say you should only pay social security in one country. Employer contributions usually follow the basis of employee contributions in this respect (e.g. don’t pay on an employee who pays social security in France instead of the UK).
- If you regularly work in the UK, NICO will try to collect primar NICs from you.
- If you go to work abroad for a UK employer NICO will continue to collect NICs for 52 weeks.
National Insurance - Class 1
Special treatment for company directors
Company directors can get lumpy payments, therefore they’re allowed some smoothing for NICs.
They use an annual earnings period and when they get paid they calculate earnings since the start of the year to figure out the appropriate level of NICs.
National Insurance - Class 1
Why is it important to maintain contributions?
In which circumstances do you get treated as if you have made the minimum contribution (even if you don’t pay NICs)?
Your number of years NIC contributions impacts the amount of state pension you can collect at retirement.
Minimum contributions are assumed for:
- Unemployed people claiming certain benefits (eg jobseekers);
- Men between womens state pension age and 65;
- On an approved training course.
National Insurance - Class 1
Impact of multiple employments
Earnings from multiple associated employments get aggregated for NIC purposes (so you can’t stay under the threshold by splitting into several jobs).
If the employers are completely separate you calculate NICs for each one separately.
However you can apply for deferment in one of the jobs if you’ll end up paying over the maximum contribution (53x maximum NIC at main rate).
National Insurance - Class 1
What is the lower earnings limit (LEL)?
This is the minimum amount you must earn before you are considered to be making a contribution towards your state pension.
Note that it is below the primary threshold (£113 vs £157, in tax tables) so if you earn £120pw you pay nothing but are assumed to be contributing.
National Insurance - Class 2 & 4
Why are self-employed rates generally different to employed?
Self employed people get lower state benefits (eg no mandatory sick pay, no contribution towards jobseekers) so their NICs are generally lower than for employed people.
National Insurance - Class 2 & 4
Differences between class 2 and 4
- Class 2 NICs give entitlement to contributory state benefits, class 4 do not.
- Class 2 are a flat rate (see tax tables) and can choose not to pay if new profits in your accounts are below £6,025 (in tax tables).
- Class 4 are percentages based on the profits on which you pay income tax (9% between the lower and upper limit, 2% above that, all rates and thresholds in tax tables).
National Insurance - Class 2 & 4
When are they paid?
Done via self assessment
- Class 2: Paid in one go on the 31st Jan following the end of the tax year.
- Class 4: 2 payments on accounts and a balancing payment (like self employed income tax).
