Chapter 4 Class 1 NIC Flashcards
NIC and class 1 NIC
There are six classes of national insurance –
• Class 1 – paid by both employees and employers on earnings from employment
• Class 1A – paid by employers only on benefits provided to employees
• Class 1B – paid by employers on Pay as you earn settlement agreements
• Class 2 – a flat rate weekly amount paid by self-employed persons
• Class 3 – voluntary contributions paid by taxpayers who wish to top up their contribution record in order to preserve their entitlement to state benefits
• Class 4 – paid by self-employed persons on the profits from their trade
Class 1 NIC – broken down into primary (paid by employees) and secondary contributions (paid by employers). Class 1 is paid on earnings from employment. Both primary and secondary contributions are accounted for under the PAYE system and paid with income tax.
Earnings – class 1 contributions are paid on earnings, any cash payment made by an employer to an employee is likely to be earnings for NIC purposes, this does not include the taxable element of termination payments. If an employer pays for an employee’s personal bills this payment constitutes earnings. If the employer makes a non-cash payment to an employee and that payment in kind can be surrendered for cash, that payment is also classed as earnings (sale of an asset is not considered to be surrendering cash and is therefore not classed as earnings). Payments in the form of readily convertible assets are earnings, as well as vouchers. Mileage payments exceeding the allowance are earnings. Many common benefits like a company car are not earnings for class 1 NIC purposes. However, it will be charged to class 1A NIC paid by the employer.
Class 1 primary contributions – these are made by employees. No NIC is paid on the first £166 earned in a week (this is the primary threshold). Earnings between £166 and £962 per week is taxed at 12%. The upper earnings limit then pay 2% on earnings in excess of the upper earnings limit
Class 1 Secondary contributions – paid by employers. 0% is paid up to the secondary threshold, which is £166 per week, from then employers paid 13.8% on earnings above the secondary threshold.
Employment allowance – an eligible employer can reduce their secondary class 1 NIC by £4,000 each year. There is no provision to carry forward any unused relief, this can be claimed by sole traders, partnerships or companies. From 2020/21 in order to be eligible for the allowance, the Class 1 NICs liability in the previous tax year must be less than £100,000, the £100,000 applies to groups of companies and only one company in the group can claim the allowance.
