Chapter 8 - National insurance contributions

Question 1

Who pays national insurance contributions?

Answer 1

National insurance contributions (NICs) are paid by self-employed individuals, employees and their employers.

Question 2

What are NICs used for?

Answer 2

National insurance contributions (NICs) are used to fund state benefits such as jobseeker’s allowance and state pensions.

Question 3

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

Answer 3

Class 1 Paid by employees and their employers

Class 1A Paid by employers

Class 2 Paid by self-employed individuals

Class 4 Paid by self-employed individuals

Question 4

How are Class 1 contributions collected?

Answer 4

You have already seen that Class 1 contributions are collected under the PAYE system on a monthly basis.

Question 5

When are Class 1A contributions payable?

Answer 5

Class 1A contributions are payable by 19 July (22 July if paid electronically) following the end of the tax year to which they relate.

Question 6

Where do Class 2 contributions come from?

Answer 6

Class 2 contributions come within the self-assessment system`

Question 7

How are Class 4 contributions collected?

Answer 7

Class 4 contributions are collected together with income tax under the self-assessment system.

Question 8

What are two types of class 1 NICs and who pays them?

Answer 8

• Class 1 Primary - paid by employees
• Class 1 Secondary - paid by employers

Question 9

How is the amount of Class 1 NICs payable determined?

Answer 9

• the age of the employee
• the level of the employee’s earnings in the ‘earnings period’.

Question 10

What is the state pension age?

Answer 10

For the purposes of your exam, you should assume that any taxpayer aged 66 or over has reached state pension age.

Question 11

What constitutes an employee’s earnings?

Answer 11

An employee’s earnings for Class 1 NIC purposes include all earnings received in monetary form: salary, commission, bonus plus vouchers exchangeable for cash, goods or services.

Earnings do not usually include any taxable benefits (except vouchers exchangeable for cash).

Question 12

What is the earnings period?

Answer 12

Most employees are paid at regular intervals (weekly or monthly). This period is the earnings period.

Question 13

Who are liable to pay Class 1 primary NICs?

Answer 13

All employees aged between 16 and state pension age are liable to pay Class 1 primary NICs.

Question 14

Using the table of NIC thresholds and tax rates, talk through the relevant parts that relate to class 1 primary NIC

Answer 14

The two thresholds, primary threshold (PT) and upper earnings limit (UEL), are given as weekly, monthly and annual figures

• Any salary under the primary threshold (PT) is taxed at a rate of nil.
• Any salary that falls between the the primary threshold (PT) and the upper earnings limit (UEL) is taxed at a rate of 12%
• Any salary over the upper earnings limit (UEL) is taxed at a rate of 2%

Question 15

When is it acceptable to use annualised PT and UEL during the exam?

Answer 15

In the examination, you might be asked to work out the annual NICs payable by an employee. In this case, it is acceptable to use the annualised limits if the employee is paid evenly throughout the tax year.

If the employee receives an additional payment such as a bonus in one earnings period, it will be necessary to calculate the NICs in relation to weekly or monthly earnings periods instead.

If asked to calculate weekly or monthly class 1 primary NIC then use the respective weekly and monthly thresholds

Question 16

Outline how to calculate an employees class 1 primary NIC

Answer 16

1) Determine if it is appropriate to use the weekly, monthly or annual versions of the thresholds
2) Determine which threshold the employee salary falls above or below
3) IF BELOW PT: the employee will pay no class 1 primary NIC on any salary below the PT - class 1 primary NIC is £nil
4) IF BETWEEN PT & UEL: first deduct the PT from the salary as this is not taxed, tax the reamaining amount at 12% - this will be the employees class 1 primary NIC
5) IF ABOVE UEL: first deduct the PT from the salary as this is not taxed. Deduct the PT from the UEL, this will be taxed at 12%. Deduct the UEL from the salary, this will be taxed at 2% - sum these two values up to give the employees class 1 primary NIC

Question 17

Who are liable to pay Class 1 secondary NICs?

Answer 17

The employers of employees

Question 18

Using the table of NIC thresholds and tax rates, talk through the relevant parts that relate to class 1 secondary NIC

Answer 18

The three thresholds, secondary threshold (ST), upper secondary threshold (UST) for under 21s and the apprentice upper secondary threshold (AUST) for under 25s, are given as weekly, monthly and annual figures

• For non-apprentices over the age of 21 (and apprentices over the age of 25): Any salary that falls under the secondary threshold is taxed at 0%, any salary over the ST is taxed at 13.8%
• For non-apprentices under the age of 21: Any salary that falls under the upper secondary threshold (UST) for under 21s is taxed at 0%, any salary over the UST is taxed at 13.8%
• For apprentices under the age of 25: Any salary that falls under the apprentice upper secondary threshold (UST) for under 25s is taxed at 0%, any salary over the AUST is taxed at 13.8%

Employment allowance is an allowance given to employers to offset against the cost of class 1 secondary NIC liabilities

Question 19

What is the lower earnings limit (LEL)?

Answer 19

The lower earnings limit (LEL) is the point at which entitlement to contributory benefits (eg, state pension) begins. If an employee is paid at a rate between the LEL and the PT, no actual contribution is payable by the employee, but the employee remains entitled to full benefits as if Class 1 contributions had been paid.

Question 20

When is it acceptable to use annualised ST, UST and AUST during the exam?

Answer 20

In the examination, you might be asked to work out the annual NICs payable by an employer. In this case, it is acceptable to use the annualised limits if the employee is paid evenly throughout the tax year.

If the employee receives an additional payment such as a bonus in one earnings period, it will be necessary to calculate the NICs in relation to weekly or monthly earnings periods instead.

If asked to calculate weekly or monthly class 1 secondary NIC then use the respective weekly and monthly thresholds

Question 21

What is the employer’s allowance?

Answer 21

Each employer can reduce their liability to NIC by £5,000 per annum. This can be used to reduce the liability to nil. The allowance is per employer regardless of the number of employees.

Question 22

Who is eligible for employers allowance?

Answer 22

All employers are eligible for employers allowance, unless:
* the company has a single director and no other employees
* the businesses total Class 1 secondary NIC liability was £100,000 or over in the previous year

Question 23

What happens if the employer’s total Class 1 secondary NIC liability for all employees is less than £5,000 and they are eligible for employers allowance?

Answer 23

If the employer’s total secondary Class 1 NIC liability for all employees is less than £5,000 and they are eligible for employers allowance, then the employer pays no secondary Class 1 NIC for the year.

Question 24

Outline how to calculate an employers class 1 secondary NIC liability for an employee

Answer 24

1) Based on the age and role type of the employee, determine which secondary threshold to use - ST, UST or AUST
2) Determine if it is appropriate to use the weekly, monthly or annual versions of the thresholds
3) Determine which threshold, of the one applicable, the employee salary falls above or below
4) IF BELOW: the employer will pay no class 1 secondary NIC for the employee on any salary below the threshold - class 1 secondary NIC liability is £nil
5) IF ABOVE: first deduct the applicable threshold from the salary as this is not taxed. The remaining salary will be taxed at 13.8% - this is the employers class 1 secondary NIC liability for the employee

Question 25

What is important to remember when calculating a businesses total Class 1 secondary NIC?

Answer 25

In the exam you should deduct the employment allowance in calculations of a business’s total Secondary Class 1 NIC where applicable unless you are told otherwise.

Question 26

Who pays Class 1A contributions?

Answer 26

Class 1A contributions are payable by employers on taxable benefits provided to employees.

Question 27

Using the table of NIC thresholds and tax rates, talk through the relevant parts that relate to class 1A NIC

Answer 27

• Taxable benefits are taxed at 13.8%

Question 28

What is the value of taxable benefits regarding Class 1A contributions?

Answer 28

The value of the taxable benefits for NICs is generally the same as the taxable value for income tax. However, any benefits taxed as earnings under Class 1 are not also subject to Class 1A charge - i.e. vouchers exchangeable for cash are treated as earning for NIC and benefits for income tax

Question 29

Outline how to calculate an employers class 1A NIC liability for an employee

Answer 29

1) Determine the taxable benefit provided to the employee
2) Tax this amount at 13.8% - this is the employers class 1A NIC liability for the employee

Question 30

Who are liable to pay Class 2 and class 4 contributions?

Answer 30

Self-employed taxpayers

Question 31

Using the table of NIC thresholds and tax rates, talk through the relevant parts that relate to class 2 NIC

Answer 31

• If a self-employed individuals profits are below the lower profits limit, not class 2 NICs are payable - class 2 NI liability is £nil
• If a self-employed individuals profits are above the lower profits limit, they must pay a flate rate weekly contribution of £3.45 per week

Question 32

Using the table of NIC thresholds and tax rates, talk through the relevant parts that relate to class 4 NIC

Answer 32

There are two thresholds, lower profit limit (LPL) and upper profit limits (UPL).
* the portion of a self-employed individuals profits below the lower profits limit is taxed at a rate of 0%
* the portion of a self-employed individuals profits between the lower profits limit and the upper profits limit is taxed at a rate of 9%
* the portion of a self-employed individuals profits above the upper profits limit is taxed at a rate of 2%

Question 33

Outline how to calculate a self-employed individuals class 2 and 4 NIC liability

Answer 33

1) Determine which threshold the individuals profits falls above or below
2) IF BELOW LPL: the individual will pay no class 2 or class 4 NIC on any profits below the LPL - class 2 and class 4 NIC is £nil
3) IF ABOVE: the individual will pay a weekly flat rate of £3.45 for the year for class 2 NIC. Their class 4 NIC will be further dependent on whether theri profits fall above or below the upper profits limit:
3) IF BETWEEN LPL & UPL: first deduct the LPL from the profit as this is not taxed, tax the reamaining amount at 9% - this will be the individuals class 4 NIC
4) IF ABOVE UPL: first deduct the LPL from the profits as this is not taxed. Deduct the LPL from the UPL, this will be taxed at 9%. Deduct the UPL from the profits, this will be taxed at 2% - sum these two values up to give the individuals class 4 NIC

Question 34

When should self-employed people register to pay self-employed NICs?

Answer 34

To avoid penalties, registration must be made in time for a return to be issued for completion, submission and payment of any liability due by 31 January following the tax year during which self employment commenced.