National Insurance Contributions (1/2 marks) Flashcards
What are the 4 ‘direct taxes’?
income tax, capital gains tax and inheritance tax, national insurance
The term ‘direct’ tax indicates taxes that are imposed directly on the taxpayer; this contrasts to ‘indirect’ taxes, which are paid as part of the price of goods or services.
What are National Insurance Contributions?
NICs are compulsory contributions made to the UK social security system, based on earnings.
The amount of NICs payable depends on EARL
Employment status
Age
Residence status
Level of earnings
There are four key factors that determine the type of NIC payable, and the amounts that are WHAT:
EARL…
Employment status (for example, employed or self-employed)
Age
Residence status
The level of earnings
NICs are payable on benefits in kind?
True or false
Partially true
NICs are only payable on benefits in Kind if the benefit can be easily converted to cash
For example, not payable on company cars (although employers do). However, Payments in kind’ that are subject to NICs includes shares that can be traded and acquired under ‘unapproved’ share option schemes. NOTE: Approved share option schemes are more common, and are NIC-free.
Class 1 primary NICs are paid by employees
Class 1 secondary NICs are paid by employers
True or false
True
CALC TIP for NICS
You DO NOT include the individuals employer pension contributions for NICs
ie,
If they earn £125,000 and they contributed 5% through net pay arrangement, for NICs the gross income is £125000. This differs to income tax. Obvs then you apply the relevant NIC rates
Employees dont pay NICs on company cars. True or false
True, because it is not easily converted to cash
Employers do however, at a flat rate of 13.8% on taxable value of the benefit in kind
Employers pay ‘Class 1A’ NICs on benefits in kind
What are Class 1A NICs?
What are Class 1 NICs?
What are Class 1 secondary NICs?
What are Class 1 primary NICs
What are Class 1A NICs?
- paid by employers on certain benefits in kind provided to employees, such as company cars or private medical insurance.
What are Class 1 NICs?
paid on earnings by both employees and employers.
What are Class 1 secondary NICs?
paid by employers on the earnings of their employees.
What are Class 1 primary NICs
paid by employees on their earnings.
What is the upper earnings limit, Primary Threshold and Lower earnings limit in relation to NICs?
Like the income tax bands but with different names and rates
Class 1 NICs adopt a ‘banded’ approach, similar to income tax, so different levels of earnings are charged at different percentages.
SEE tax table
When calculating NICs for directors what must you do which differs to employees
For directors you use the annual NIC threshold
For employees you use the weekly NIC threshold
What are fringe benefits?
They are employee benefits and can be treated as a benefit in kind depending on what it is
When are Class 1A NICs payable
What happens if these are not paid by the employer?
Class 1A NIC contributions are based on P11D benefits, so are calculated at the end of the tax year, when all the benefits in kind are known.
The first late payment does not attract a charge
Thereafter, the penalties start at 1% of the amount outstanding; but could rise to 5% depending on the number of late payments made within a tax year
Class 1 Secondary NICs are not payable on employee aged under age of 21 or apprentices under 25? True or false
True but only if they earn under the Upper earning Limit
Above that limit, the employer would pay NICs at 13.8%
NICs can be credited without the individual actually paying them
True or false
True
This can happen where
The employee earns above the LEL, but below the PT ( common in family-run companies)
or periods of maternity, full time training, sickness causing unemployment
LOOK AT 2.2.1 for easy to understand image
The self-employed generally pay a lot lower NICs than employees.
True or false
True ( the self-employed are generally entitled to fewer benefits, however such as job seekers allowance)
Self employed pay Class 2 and Class 4 contributions,
Which one builds entitlement to the state pension?
Class 2 only
What are class 2 NICs
Flat rate of 3.45 a week, paid by Self employed
Paid annually by 31st January
Class 2 NICs are based on a flat rate where an individual’s ‘earnings’ exceed £12,570 in 2024-25, ie the LPL
The self employed have a ‘small profits threshold (SPT)’ of £6725
If profits are between the SPT and LPL (£6725 - £12,570) no NICs are paid but the person receives the contribution
If profits are below the SPT no NIC contribution is made or payable, but can be made up voluntarily if they want
Above LPL normal rates apply
SEE TAX TABLE!!
EXAM TIP.
IF THERE IS A CLASS 4 NIC QUESTION ANNUAL RATE IS USED
The self-employed are only liable to pay Class 2 NICs if they are resident in the UK, or have been resident in the UK for HOW LONG?
26 out of the 52 weeks before the relevant contribution week.
This is how a persons residential status can affect their NICs payable
NOTE: MANY OPT TO PAY CLASS 2 IF IF ARENT LIABLE TO ANYWAY TO GAIN ENTILEMENT TO SINGLE TIER PENSION
By contrast, Class 4 (which does not gain entitlement to any benefits) is not due unless an individual is definitely resident in the UK and operating on a self-employed basis.
LOOK AT 2.4. THIS SHOWS HOW BEING EMPLOYED BY MULITPLE COMPANIES AFFECTS NICS
Clarissa, 51, is employed. She has earnings of £1,100 per week. How much weekly National Insurance will she pay in the current tax year?
£60.66
£89.66
£102.96
£118.70
£60.66
The amount from the PT to the UEL (£242 to £967) £725 is taxed at 8% = £58.00.
The residual amount of £133 (£1,100 - £967) is then taxed at 2% = £2.66. The total weekly Class 1 Primary NICs is £60.66.
Olivia, 34, is a self-employed beauty therapist. In the current tax year, her profits amount to £51,000. In October 2022, she paid a £2,000 contribution to her personal pension plan.
In total, how much National Insurance will Olivia pay for the current tax year?
£2,456.00
£2,932.62
£3,916.35
£3,967.45
£2,456.00
As a self-employed individual, Olivia will pay both Class 2 and Class 4 NICs.
Class 2 NICS: £3.45 x 52 = £179.40. Class 4 NICs are based on profits: (£50,270 - £12,570) £37,700 x 6% = £2,262 and (£51,000 - £50,270) £730 x 2% = £14.60. Added together, these amounts total £2,456.00.
The personal pension contribution does not lower her profits subject to NICs.
Claire is self-employed, and she prepares her accounts to 31 December each year. How will her earnings be calculated for the purposes of her class 2 and class 4 national insurance contributions (NICs) in the current tax year?
Earnings for class 2 NICs are based on the tax year, so her accounting year profits will have to be apportioned on a pro-rata basis. Earnings for class 4 NICs will be her profits chargeable to income tax for the accounting year ending on 31 December 2024.
Earnings for class 4 NICs are based on the tax year, so her accounting year profits will have to be apportioned on a pro-rata basis. Earnings for class 2 NICs will be her profits chargeable to income tax for the accounting year ending on 31 December 2024.
Earnings for both class 2 and class 4 NICs will be her profits chargeable to income tax for the accounting year ending on 31 December 2024.
Earnings for both class 2 and class 4 NICs are based on the tax year, so her accounting year profits will have to be apportioned on a pro-rata basis.
Earnings for both class 2 and class 4 NICs are based on the tax year, so her accounting year profits will have to be apportioned on a pro-rata basis.
Class 2 NICs are based on the net profits for the tax year as shown by the business accounts.
Class 4 has more in common with income tax, and is charged for a tax year on the profits that are assessed for income tax for that year, so now that profits have to be apportioned for income tax purposes to the tax year, regardless of accounting period date, the profits for NI will also need to be apportioned.
Which of the following individuals would be eligible to pay Class 3 national insurance contributions (NICs) in the current tax year?
Marlene, who is 67, and has not worked since she was 59
Sue, who is 54, and did not work for the years between the ages of 25 and 45
Julia, who is 44, and has just returned to work after not working for four years
ONLY JULIA
Marlene can no longer contribute, as she is beyond her state pension age. Sue also cannot contribute to Class 3 NICs, as it is more than 6 years after the tax years to which the payments would relate.
Julia would be the only eligible individual.
Jenny has not paid any employee National Insurance (NI) contributions for the current tax year, but her NI contribution record has been credited. This is because…
she was working in multiple employments during the previous tax year
her husband is paying the maximum amount of Class 1 at the main rate
she is due to retire later in the tax year
she earns an amount marginally above the lower earnings limit
she earns an amount marginally above the lower earnings limit
Individuals can have their contribution records ‘credited’ even without paying NICs. Examples include full time training, unemployment and sickness, statutory maternity and paternity pay etc.
Another way to achieve the same result is to receive an income below the primary threshold but at, or above, the lower earnings limit.
Katrina has been told that, as a result of her self-assessment, she is liable to pay Class 4 National Insurance contributions. This confirms that she has…
earned all of her income from self-employment
earned at least part of her income from self-employment
reached her State Pension Age before 6 April 2016
returned to work following a period of maternity leave
earned at least part of her income from self-employment
Self-employed individuals are liable to Class 4 NICs on profits over a set amount. If someone is liable to Class 4 NICs, this indicates that they receive at least some of their income from self-employment, but they may also be employed and liable to Class 1 as well.
Those reaching their State Pension Age before 6 April 2016 who wanted to increase their entitlement would have paid Class 3a NICs.
There are no ‘special’ payments needed when returning from maternity leave. NICs would have been credited in the meantime anyway.
