Chapter 8 - National insurance contributions

Question 1

Q: What are the two types of NICs paid by self-employed individuals?

Answer 1

A: Class 2 NICs (flat rate) and Class 4 NICs (based on tax-adjusted trading profits).

Question 2

Q: Who pays Class 2 and Class 4 NICs?

Answer 2

A: Sole traders and partners aged 16 to state pension age (assumed to be 66 in the exam).

Question 3

Q: What are the due dates for Class 2 and Class 4 NICs?

Answer 3

A:

Class 2 NICs: By 31 January following the tax year through self-assessment.

Class 4 NICs: With income tax payment on account or balancing payment.

Question 4

Q: What is the rate for Class 2 NICs, and when is payment treated as made?

Answer 4

A:

Flat rate: £3.45 per week.

Payment is treated as made if profits are between £6,725 (SPT) and £12,570 (LPL), despite the fact that payment isn’t owed under £12,570.

Question 5

Q: By when must a trader register with HMRC for Class 2 NICs?

Answer 5

A: By 31 January following the end of the tax year.

Question 6

Q: What are the rates for Class 4 NICs?

Answer 6

A:

0%: Profits up to £12,570.
9%: Profits between £12,571 and £50,270.
2%: Profits above £50,270.

Question 7

Q: What is the registration deadline for Class 4 NICs?

Answer 7

A: By 5 October following the end of the tax year.

Question 8

Q: When must payments on account (POAs) for Class 4 NICs and income tax be made?

Answer 8

A:

1st POA: 31 January in the tax year.
2nd POA: 31 July following the tax year.

Question 9

Q: How are POAs calculated?

Answer 9

A: 50% of the previous year’s income tax and Class 4 NIC liability.

Question 10

Q: Under what circumstances are POAs not required?

Answer 10

A: If the previous year’s tax liability is:

Less than £1,000, or
Less than 20% of total income tax and Class 4 NIC liability.

Question 11

Q: What is a balancing payment, and when is it due?

Answer 11

A: Final payment for unpaid income tax, NICs, and CGT, due 31 January following the end of the tax year.

Question 12

Q: What penalties and interest apply to late balancing payments?

Answer 12

A:

Penalty: Based on delay length and unpaid tax.
Interest: Charged from the due date to the day before payment.

Question 13

Q: What are Class 1 NICs, and who pays them?

Answer 13

A: National Insurance Contributions on cash earnings:

Class 1 Primary: Paid by employees.
Class 1 Secondary: Paid by employers.

Question 14

Q: What are the rates for Class 1 Primary NICs (weekly limits)?

Answer 14

A:

0%: Earnings up to £242/week.
12%: Earnings between £242 and £967/week.
2%: Earnings above £967/week.

Question 15

Q: What are the annual limits for Class 1 Secondary NICs?

Answer 15

A:

0%: Earnings up to £9,100/year.
13.8%: Earnings above £9,100/year.

Question 16

Q: What are the Class 1 NIC reduced rates for young people and apprentices?

Answer 16

A:

0%: Earnings up to £50,270/year.
13.8%: Earnings above £50,270/year.

Question 17

Q: What is the employment allowance, and who can claim it?

Answer 17

A: £5,000/year per employer, available unless:

Single-director companies with no other employees.
Employers with prior Class 1 NIC liability ≥ £100,000.

Question 18

Q: What is Class 1A NIC, and who pays it?

Answer 18

A: Employer-only NIC on taxable benefits (excluding cash-exchangeable vouchers), at 13.8%.

Question 19

Q: When is Class 1A NIC due?

Answer 19

A: By 19 July (or 22 July if paid electronically) following the end of the tax year.

Question 20

Q: What is the small profits threshold (SPT) for Class 2 NICs, and why is it significant?

Answer 20

A: The SPT is £6,725. Profits between the SPT and the lower profits limit (LPL) of £12,570 are treated as if Class 2 NICs are paid, even though no actual payment is required.

Question 21

Q: How are NIC calculations rounded in exams?

Answer 21

A: NIC calculations should be rounded to the nearest pound at each stage of the workings.

Question 22

Q: What is the difference between payments on account and balancing payments?

Answer 22

A:

Payments on account: Prepayments towards income tax and Class 4
NICs, based on the prior year’s liability.

Balancing payments: Settles any outstanding liability after deducting POAs.

Question 23

Q: What happens if payments on account exceed the actual liability?

Answer 23

A: Any overpayment is refunded or offset against future tax liabilities.

Question 24

Q: What are the payment methods and deadlines for PAYE and Class 1 NICs?

Answer 24

A:

Deadline: 19th of each month (extended to the 22nd for electronic payments).

Requirement: Employers with 250+ employees must pay electronically.

Question 25

Q: What are the key differences between Class 1A and Class 1 NICs?

Answer 25

A:

Class 1 NICs: Paid on cash earnings by employees (Primary) and employers (Secondary).

Class 1A NICs: Paid only by employers on taxable benefits, excluding cash-equivalent vouchers.

Question 26

Q: How does 2024 being a leap year affect late payment interest calculations?

Answer 26

A: February includes 29 days, which must be accounted for when calculating interest.

Question 27

Q: How are POAs adjusted if income tax liability decreases significantly from the prior year?

Answer 27

A: A taxpayer can request HMRC to reduce their POAs based on the lower expected liability.

Question 28

Q: What happens if a trader fails to register for Class 2 or Class 4 NICs by the deadlines?

Answer 28

A: Late registration may lead to penalties and interest charges on unpaid contributions.

Question 29

Q: What should you assume in the exam about taxpayers’ eligibility for reduced NIC rates?

Answer 29

A: Unless told otherwise, assume taxpayers are over 21 and not apprentices, and employers are eligible for the employment allowance.