Chapter 2 - NICs

Question 1

List four main classes of NICs + fringe benefits

Answer 1

Class 1 - employees and employers %
Class 2 - self-employed flat rate
Class 3 - voluntary %
Class 4 - self-employed %

Fringe benefits such as company car subject to Class 1a NICs

Question 2

Share options - unapproved and approved schemes

Answer 2

NICs payable on shares readily convertible into cash which can leave some successful start ups with huge liabilities if they have unapproved share option schemes. Approved arrangements are free of NICs

Question 3

NIC contributions - Class 1;
- rates change, employer upper limit, deducted how (ee&er), age, post SPA, employees don’t pay secondary when (3) and period

Answer 3

Class 1 provides around 96% of total NI fund;

• changes in rates at beginning of the tax year
• no upper limit for employer contributions
• employees NICs not deducted from pay before tax. Employers contributions deducted from their profits.
• payable between 16 and SPA
• employee working post SPA doesn’t pay NICs but work does (secondary)
• employers don’t have to pay secondary NICs for employees under 21 on up to secondary threshold. Same for apprentice under 25 and armed veteran in first year of civil employment
• NICs based on periods such as week and month depending on how paid

Question 4

Earnings and contribution thresholds;
Primary contribution threshold - amount and what is it
Secondary threshold - amount and what is it
Lower earnings limit - amount and min level for what
Upper earnings limit - amount and what is it, aligned with and employers

Answer 4

Primary contribution threshold - £184pw - level of earnings above which employees have to pay class 1 NICs

Secondary threshold - £170pw - level of earnings employers have to pay class 1 for ages 21 and over, apprentices aged 25 and over and vets past 1 year civil employment.

Lower earnings limit - £120 pw - min level of earnings for state bens

Upper earnings limit - £967pw - max level of earnings on which an employees must pay NICs at the main rate. Aligned with income tax higher rate band. Employers NICs charged at same rate regardless of UEL.

Question 5

Rates of class 1 NICs - depend on what (2) and can pay reduced rate when?

Employee contributions;
- no NIC when?, % charged when, UEL charge and directors period

Example - earnings of £1,200 per week - what out NIC payable

Answer 5

Depend on level of earnings and classification of employee. Reduced rate for certain married women.

Employees contributions;

• No employee NICs payable on earnings below the primary threshold (184)
• post above amount, pay 12% up to UEL
• anyone over UEL is subject to 2% (additional primary percentage)
• directors worked out on an annual basis as opposed to monthly/weekly

Example;
- £184 free
- £783*12% = £93.96.  (£967-184)
- £22*2% = £4.66 (1200-967)
= £98.62

Question 6

Rates of C1 NICs - employers contributions - first amount that is free for employer, above what contributes what % and max?, for secondary threshold (3) rates, allowance and when not available (who and amount)

Answer 6

Employers contributions;

• first £170 of earnings is free of employer contributions
• above secondary contribution threshold, employer pays 13.8% and no income ceiling.
• for aged under 21, under 25 apprentices and vets in first year, NIC 0% up to £967 then 13.8% on anything above.
• get an allowance of £4K per year
• allowance not available for sole directors or if employers contributions were £100k+

Question 7

Married women reduced C1 NICs rates - lower rates causes what, election no longer effective when (4), rates (think bands, 2) and affect on employers rate

Answer 7

Pre 04/77 married women could elect to pay reduced NICs (can now be revoked) but lowers rights to SB. Election no longer effective if;

• divorced, remarried, two consecutive years with no earnings above LEL and if normal contributions are paid in error. Married women’s NIC rates;
• £184-967 = 5.85%
• £967+ = 2%
• rate paid by employer not affected by reduced rate

Question 8

Class 1A contributions - who has to pay, who valued (formula), non-taxable fringe bens and NICs and childcare can be what up to what amount

Answer 8

Most fringe bens subject to employers but not employees

• based on value on benefit*13.8%
• non-taxable fringe bens not subject to NICs
• first £55pw childcare benefits free of tax

Question 9

NIC credits - can be credited as if mon contribution made when;
- training, period of?, baby and income, NIC rules for max amount payable at main rate-

Max payable at main rate? And what happens if over due to two jobs

Excess payments?

Answer 9

Can be credited as if min contribution has been paid if;

• during period of full time training
• periods of unemployment or sickness
• periods of entitlement to maternity
• where income below primary threshold but above LEL

Max payable per tax year at main rate - (50270-9568)*12% = £4884.24
- if paying more than this due to 2+ jobs, then one employer instructed to deduct NICs at only 2% on annual earnings over £9568

• can usually recover excess payments

Question 10

Self employed Classes 2 summary and rates- gives entitlement to what for who, who must pay, rate, no contributions when and can choose to do what and how calc’d

Weekly rate and max payable per annum

Answer 10

• only class 2 NICs give entitlement to SBs for self-employed.
• self employed and between 16 & SPA must pay class 2 NICs
• charged at flat rate for each week as SE
• no contributions due if below small profits threshold of £6,515 but can choose to contribute voluntary to build up SB record
• calc done via self-assessment

Rates;

• weekly flat rate - £3.05
• max payable pa - £158.60

Question 11

Self employed - Class 4 NICs - not payable when, based on what post what (2), allowances for c4 purposes, charged on what and trading losses can be used for what

Rates - main rate and UEL

Answer 11

• not payable if under 16 or over SPA at beginning of assessment period
• based on profits post capital allowances and losses brought forward
• personal allowances and pension contributions can be deducted for income tax not deducted for C4 purposes.
• charged on profits that are assessed for income tax purposes
• tradings losses in prev tax year can be used to offset trading profits

Rates;

• 9% at main rate (between 184pw - UEL)
• 2% above UEL

Question 12

Annual maximum rates - C1+C2 , C2+C4 and C1, C2 + C4

Answer 12

Class 1 + Class 2 = £4,884.24 - max amount payable is max C1 payable
Class 2 + Class 4 = £3,821.78 - think max for each class plus each other

Class 1, 2 + 4 = max C4 NICs (£3,663.18) - C1 NICs paid

Question 13

Class 3 Voluntary contributions - why paid, can only be paid when, rate pw, collected when, must be (3), if abroad can pay if (2), cant be paid when and timeframe

Answer 13

• paid to up NIC record for state bens
• can only be paid if insufficient class 1 or 2 NICs paid that year
• £15.40pw
• collected quarterly or via monthly DD
• must be in UK, previously liable to pay 1 or 2 and been resident for at least 26 weeks
• if abroad can pay if previous resident or paid NICs in UK
• cant be paid when reached SPA
• can be paid up to six years after for tax years they relate to