2 - National Insurance Contributions (A & B)

Question 1

What are the 5 classes of NICs and who pays them?

Answer 1

Class 1, paid by employees and their employers
Class 1A, paid by employers for BIKs (fringe benefits)
Class 2 (flat rate), paid by the self-employed
Class 3, paid by individuals who want to fill gaps in their NIC record to enhance their entitlement to State benefits, most notably to the new State Pension
Class 4 (percentage rate), paid by the self-employed

Question 2

Are contributions to registered pension schemes liable to NICs?

Answer 2

No

Question 3

What is the minimum and maximum ages for paying class 1 NICs for both employees and employers?

Answer 3

Age 16 - state pension age, but no limits on the employer. Employee stops paying at state pension age, even if they continue working past state pension age.

Question 4

What is the The Lower Earnings Limit (LEL) amount, and what does it mean?

Answer 4

£123 pw
Up to this level, no NICs are payable

Amount is contained in tax tables

Question 5

Are company directors liable to class 1 NICs? Explain.

Answer 5

Yes, because they are also employees

Question 5

What is The Upper Earnings Limit amount, and what does this mean?

Answer 5

£967 pw

Employee NICs are payable at 12% (normal rate), up to this limit
Employer NICs at 13.8%

Question 6

Why are company directors assessed on an annual basis for NICs, instead of weekly/monthly?

Answer 6

To stop them reducing their NICs liability by paying themselves irregular amounts

Question 7

What is the class 2 NICs flat rate?

Answer 7

Class 2 is a flat rate of £3.45 per week

Question 8

Who pays class 2 NICs and in which circumstances?

Answer 8

It is payable by the self-employed with net profits in excess of the lower profits limit of £12,570.

Those with profits between the small profits threshold of £6,725 and £12,570 are deemed to have paid Class 2 NICs, without actually having to pay them.

In other words, they get state credit still.

Question 9

What is the difference between a contract of service and a contract for services?

Answer 9

Contract of service = employed
Contract for services = self-employed

Question 10

Employer-financed retirement benefits schemes are subject to NICs. True or false?

Answer 10

False - they are not earnings

Question 11

Is the benefit of having a company car subject to class 1 NICs?

Answer 11

No, but it’s likely be subject to class 1A NICs though (fringe benefits)

Question 12

What is the upper limit for employers’ contributions in class 1 NICs?

Answer 12

There is no upper limit

Question 13

When is an employee a freeport employee?

Answer 13

An employee will be deemed to be working in the Freeport tax site if they spend 60% or more of their working hours in that tax site.

Question 14

Employers do not pay secondary NICs for a qualifying freeport employee in which circumstances?

Answer 14

For the first three yearsof employment, up to an annual earnings limit of £25,000.

Question 15

What is meant by:

1. Lower earnings limit (LEL)
2. Primary contribution threshold
3. Upper earnings limit (UEL)
4. Secondary threshold

Answer 15

1. entitlement to state benefits but no need to pay NICs
2. NICs paid at 12% over this amount
3. NICS paid at 2% over this amount
4. the level of earnings above which employers have to pay class 1 NICs for employees aged 21 and over, for apprentices aged 25 and over, and for armed forces veterans not in the first year of their civilian employment.

Question 16

What is the amount of the upper secondary threshold (UST), an apprentice upper secondary threshold (AUST) and a veterans’ upper secondary threshold (VUST)?

Answer 16

£967 (same as the UEL)

Question 17

How much is the freeport upper secondary threshold (FUST)?

Answer 17

£481 per week

Question 18

What percentage does an employee pay on NICs above the primary contribution threshold and up to the UEL?

Answer 18

12% (main primary percentage) over threshold but below UEL.
2% over UEL (additional primary percentage)

Question 19

When do employers start paying secondary class 1 NICs for employees aged under 21, apprentices aged under 25 and armed forces veterans in the first year of their civilian employment?

What is the rate paid above this?

Answer 19

Above UEL £967
13.8%

Question 20

When do employers start paying secondary class 1 NICs for qualifying employees working in freeports?

What is the rate paid?

Answer 20

Above £481
13.8%

Question 21

What is the annual employment allowance, before they have to pay secondary NICs?

Answer 21

£5,000

Question 22

In which 2 circumstances could a company not be entitled to the annual employment allowance?

Answer 22

1. Director is sole employee
2. Employers contributions were £100,000+ in previous year

Question 23

What is the purpose in allowing a company an annual allowance so they don’t pay secondary NICs before exceeding this rate?

Answer 23

To encourage employment

Question 24

1. What is the married women’s reduced NIC rate
2. Who is eligible?

Answer 24

£242 to £967 a week 5.85%
Above £967 a week 2%

Married women and widows, elected before 6 April 1977

Question 25

The election for married women reduced NICs is no longer effective in which 4 circumstances?

Answer 25

• divorce or annulment
• remarriage
• two complete consecutive tax years with no earnings above the LEL and no self-employed
  earnings
• in some cases, if normal contributions are paid in error

Question 26

What effect do reduced NI contributions for married women have on the new state pension?

Answer 26

May not build enough NI credit for a full state pension.

Question 27

What are the married women’s NIC rates for 2023/24?

Answer 27

£242 to £967 a week = 5.85%
Above £967 a week = 2%

Employer (secondary) rates are not affected by this.

Question 28

Who pays class 1A contributions and what are they?

Answer 28

Employer on fringe benefits such as company cars and private medical insurance. EMPLOYEES DO NOT PAY THESE.

Question 29

How are class 1A NICs calculated?

Answer 29

On the value of benefits as determined for income tax purposes.

Question 30

If the fringe benefit is non-taxable, what does this mean for class 1A NICs?

Answer 30

Not liable

Question 31

Trivial benefits costing less than how much, are generally free of class 1A NICs.

Answer 31

£50

Question 32

What is the class 1A NICs rate for 2023/24?

Answer 32

13.8%

Question 33

When are class 1A payments due to be made?

Answer 33

22 July after the end of the tax year to which they relate,
but on 19 July if the payment is not made electronically. If a deadline falls on a weekend, then payment must be made by the previous working day, unless it is made by ‘faster payments’.

Question 34

An employer pays its class 1A NICs for 2023/24 electronically. What is the due date?

Answer 34

22 July after the tax year end (2024)`

Question 35

What form does the employer use to report class 1A NICs?

Answer 35

P11D

Question 36

What’s the difference between a P11D and P11D(b) form?

Answer 36

P11D (EMPLOYER) - must be completed for each employee who has taxable expenses and/or benefits (unless these have been payrolled).

P11D(b) (EMPLOYEE) shows the NICs due on expenses and benefits (including payrolled benefits) and includes an employer’s declaration that the P11Ds are complete.

Question 37

When do P11D and P11D(b) forms need to be submitted by?

Answer 37

6 July after the end of the tax year

Question 38

What are the penalties to employers for late class 1 NICs?

Answer 38

6m+ = 1% of the late amount.

The rate of penalty increases depending on the number of late payments within the same tax year.

A 5% penalty may be charged if payments are more than six months late, with a further 5% charged if payment is still not made after twelve months.

Question 39

Up to three penalties of 5% may be charged where the annual class 1A payment is made late. At what point do they apply?

Answer 39

1. initial penalty if full payment is not made within 30 days of the due date
2. if payment is more than six months late
3. if payment is over twelve months late

In addition, any late payment will be charged interest on a daily basis.

Penalties are charged on a monthly basis if real-time reporting submissions are made late. There is no penalty for the first late submission during a tax year, but thereafter a monthly late-filing penalty of between £100 and £400 is charged depending on the number of employees. An additional 5% penalty may be charged where a submission is three months late.

Question 40

What makes up the The European Economic Area (EEA)?

Answer 40

27 Member States of the European Union + Norway, Iceland and Liechtenstein.

Question 41

If a UK employee leaves to work in the EU, Norway Iceland or Liechtenstein temporarily, how long can they continue to pay NI instead of the local social security, as long as they have a certificate from HMRC?

Answer 41

EU = up to two years
Norway = 3 years
Iceland or Liechtenstein = no exemption

Question 42

What is the annual primary threshold for directors NICs and the rate applied when exceeded?

Answer 42

£12,570, with a blended rate of 11.5%

Question 43

Directors who have an employment contract should not reduce their employment earnings (that is excluding dividends) below what amount?

Answer 43

National living wage
£10.42 (age 23+)
£10.18 (age 21-22)

Question 44

What are the maximum NICs per year at the main rate for an employee?

Answer 44

The limit is £37,700 (£50,270 – £12,570) × 12% = £4,524.

Question 45

What is the secondary threshold amount and what does it mean?

Answer 45

£175 pw and means employers do not pay NICs on employee earnings below this amount

Question 46

If an upper secondary threshold (UST), an apprentice upper secondary
threshold (AUST) and a veterans’ upper secondary threshold (VUST) exist at the exact same amount of the UEL of £967, why do they all have different names?

Answer 46

So they can independently be adjusted in future if required.

Question 47

FUST – what is it and when does it apply? What does the threshold mean?

Answer 47

Freeport upper secondary threshold £481 pw
Dictates when an employer should pay Class 1 National Insurance Contributions

Question 48

What is a freeport?

Answer 48

A freeport is an area that has one goal: to create economic activity. This can be through trading, investments and job opportunities happening in or near airports and shipping ports. To do this, freeports are also exempt from paying any tariffs to the government.

Question 49

What 5 state benefits do you need have adequate NI credits for, to be eligible?

Answer 49

• the new State Pension;
• new style Jobseeker’s Allowance (class 1 NICs only);
• bereavement payments;
• new style contribution-based Employment and Support Allowance (ESA); and
• Maternity Allowance.

Question 50

Where an individual has both employed earnings [subject to class 1 contributions] and self-employed earnings [subject to class 2 contributions], the combination of the two National Insurance contributions [NICs] must not be more than what?

Answer 50

Maximum annual primary main rate class 1 NICs

Question 51

Where individuals are not paying NICs, their contribution records may be credited as if minimum contributions had been paid. In what circumstances could this happen?

Answer 51

• during periods of full-time training and for a short period afterwards;
• during periods of unemployment and sickness;
• during periods of entitlement to Statutory Maternity, Paternity, Shared Parental and Adoption Pay (SMP, SPP, ShPP and SAP); and
• where income is below the primary contribution threshold, but at or above the LEL.

Question 52

Examples of payments from an employer on which NICs might not be due are what?

Answer 52

Compensation, damages and redundancy

Question 53

When there are no reciprocal arrangements between the UK and another country, to regulate the collection of contributions and the entitlement to benefits, how and when do HMRC attempt to collect the taxes, for a person COMING to the UK to work?

Answer 53

They will collect taxes REGULARLY, but in less clear cut circumstances, they will first wait until the individual has been resident in the UK for 52 weeks.

Question 54

When there are no reciprocal arrangements between the UK and another country, to regulate the collection of contributions and the entitlement to benefits, how and when do HMRC attempt to collect the taxes, for a person LEAVING the UK to work?

Answer 54

HMRC will usually continue to collect NICs for 52 weeks.

Question 55

Is rental income subject to NICs?

Answer 55

No, NICs are only liable on earned income, which does not include rental income