Chapter 8 - National insurance contributions Flashcards
Who pays national insurance contributions?
National insurance contributions (NICs) are paid by self-employed individuals, employees and their employers.
What are NICs used for?
National insurance contributions (NICs) are used to fund state benefits such as jobseeker’s allowance and state pensions.
What are the four classes of NICs?
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
What are the instructions regarding rounding when calculating NICs in the examinations?
Note that when calculating NICs in the examination you should round mathematically at each step of your computation.
Who administers NICs?
National insurance contributions are administered by the National Insurance Contributions Office (NICO) which is part of HMRC.
How are Class 1 contributions collected?
You have already seen that Class 1 contributions are collected under the PAYE system on a monthly basis.
When are Class 1A contributions payable?
Class 1A contributions are payable by 19 July (22 July if paid electronically) following the end of the tax year to which they relate.
Where do Class 2 contributions come from?
Class 2 contributions come within the self-assessment system`
How are Class 4 contributions collected?
Class 4 contributions are collected together with income tax under the self-assessment system.
Who pays Class 1 primary contributions?
Class 1 primary contributions are paid by employees.
Who pays Class 1 secondary contributions?
Class 1 secondary contributions are paid by employers.
How is the amount of Class 1 NICs payable determined?
The amount of Class 1 NICs payable depends on the age of the employee and the level of the employee’s earnings in the ‘earnings period’.
Who are liable to pay Class 1 primary NICs?
All employees aged between 16 and state pension age are liable to pay Class 1 primary NICs.
What is the state pension age?
For the purposes of your exam, you should assume that any taxpayer aged 65 or over has reached state pension age.
What constitutes an employee’s earnings?
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.
What is the earnings period?
Most employees are paid at regular intervals (weekly or monthly). This period is the earnings period.
What is the primary threshold (PT)?
£166 per week, £719 per month or £8,632
per year
For employees who earn less than the PT, what is the primary contributions payable?
Nil
What is the upper earnings limit (UEL)?
£962 per week, £4,167 per month or £50,000
per year
For employees who earn between the PT and upper earnings limit (UEL), what is the primary contributions payable?
Earnings less PT x 12%
For employees who earn in excess of upper earnings limit (UEL), what is the primary contributions payable?
UEL less PT x 12%
plus
Earnings less UEL x 2%
When is it acceptable to use annualised PT and UEL during the exam?
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 of £8,632 (PT) and £50,000 (UEL) 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.
What is the secondary threshold for employees aged 21 or over?
£166 per week, £719 per month or £8,632
per year
What is the upper secondary threshold (UST) for employees aged under 21 years old?
£962 per week, £4,167 per month or £50,000
per year
What is the apprentice upper secondary threshold (AUST) employees classed as apprentices and aged under 25 years old
£962 per week, £4,167 per month or £50,000 per year
What are the secondary Class 1 NICs for 2019/20 for employees aged 21 or over?
Not above secondary threshold (ST) - Nil
Above ST - Earnings less ST x 13.8%
What are the secondary Class 1 NICs for 2019/20 for employees aged under 21 years old?
Not above upper secondary threshold (UST) - Nil
Above UST - Earnings less UST x 13.8%
What are the secondary Class 1 NICs for 2019/20 for employees classed as apprentices and aged under
25 years old?
Not above apprentice upper secondary
threshold (AUST) - Nil
Above AUST - Earnings less AUST x 13.8%
What is the employer’s allowance?
The total secondary Class 1 NICs of most employers is reduced by £3,000 per year (2019/20).
What happens if the employer’s total secondary Class 1
NIC liability for all employees is less than £3,000 for 2019/20?
If the employer’s total secondary Class 1
NIC liability for all employees is less than £3,000 for 2019/20, the employer pays no secondary
Class 1 NIC for the year.
Which employers are not eligible for the employer’s allowance?
The employment allowance is not available to companies with a single director and no other
employees.
Who pays Class 1A contributions?
Class 1A contributions are payable by employers on taxable benefits provided to employees.
What is the rate at which Class 1A contributions are payable?
13.8%
What is the value of taxable benefits regarding Class 1A contributions?
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.
Who are liable to Class 2 and Class 4 contributions?
Self-employed taxpayers are liable to both Class 2 and Class 4 NICs.
Which contribution among Class 2 and Class 4 contribute to an individual’s contribution record?
Class 2 payments count towards an individual’s
contributions record, while Class 4 payments do not.
What is the weekly amount of Class 2 contributions?
A self-employed individual aged between 16 and state pension age is required to pay Class 2 contributions (equivalent of £3.00 per week of self-employment for 2019/20).
What is the amount of Class 2 contributions payable by self-employed individuals earning below the small profits threshold?
No Class 2 contributions are required if the individual’s profits are below the small profits threshold (£6,365 for 2019/20).
Can taxpayers with profits below the threshold pay Class 2 contributions voluntarily?
Taxpayers with profits below the threshold are not liable for Class 2 NICs but are given the option to pay these voluntarily to protect their entitlement to
contributory benefits.
What are the Class 4 contributions payable?
Not above lower profits limit (£8,632) - Nil
Between lower profits limit and upper profits
limit (£50,000) - Earnings less lower profits limit x 9%
In excess of upper profits limit - Upper profits limit less lower profits limit x 9%
plus
Earnings less upper profits limit x 2%
When should self-employed people register to pay self-employed NICs?
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.
