Chapter 7: National Insurance

Question 1

National Insurance

Answer 1

National insurance contributions are payable in order to qualify for certain state benefits such as the state pension.

Is payable by individuals who are:
-16 or over until retirement age
-Earning above £184 per year (£9568 per year) as am employee
-Self-employed and earning profits above a certain level

Question 2

Class 1 National Insurance

Answer 2

Relates to employment
Expense to employer and employee

Employer deducts Class 1 Primary contributions from the employee each payday and pays over to HMRC on their behalf - expense suffered by the employee

Employer is required to pay Class 1 Secondary contributions on the employee’s cash earnings and class 1a contributions on any non-cash benefits provided to the employee - expense suffered by the employer

Question 3

Class 1 Primary contributions

Answer 3

Employees suffer class 1 primary contributions on gross earnings

Gross earnings are before any allowable deductions. Earnings include cash equivalent benefits like shopping vouchers but exclude benefits which cannot be converted to cash like a company car

Question 4

Class 1 secondary contributions

Answer 4

Employers will be required to pay class 1 secondary contributions on gross earnings

Question 5

Employment allowance

Answer 5

most employers are entitled to annual employment allowance of £4000 (ref material) which can be used to reduce the employer’s class 1 secondary liability

Cannot be used against class 1a contributions

per year, per employer

EA is not available for companies with one employee

Question 6

Class 1a contributions

Answer 6

Employer payable

on taxable benefits provided to an employee and not previously assessed under class 1 secondary

Question 7

Tax planning

Answer 7

Employee might choose to receive non-cash benefits such as company car rather than an equivalent payment as salary or as a bonus.

This is because employees only pay class 1 primary contributions on gross cash earnings

Employer may choose to provide exempt benefits as part of a remuneration package for an employee, rather than a taxable benefits or cash payments. AS we know the employer pays class 1 secondary on gross cash earnings of the employee and class 1a on taxable benefits provided to an employee