National Insurance Contributions (1/2 marks)

Question 1

What are the 4 ‘direct taxes’?

Answer 1

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.

Question 2

What are National Insurance Contributions?

Answer 2

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

Question 3

There are four key factors that determine the type of NIC payable, and the amounts that are WHAT:

Answer 3

EARL…

Employment status (for example, employed or self-employed)

Age

Residence status

The level of earnings

Question 4

NICs are payable on benefits in kind?

True or false

Answer 4

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.

Question 5

Class 1 primary NICs are paid by employees

Class 1 secondary NICs are paid by employers

True or false

Answer 5

True

Question 6

CALC TIP for NICS

Answer 6

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

Question 7

Employees dont pay NICs on company cars. True or false

Answer 7

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

Question 8

What are Class 1A NICs?

What are Class 1 NICs?

What are Class 1 secondary NICs?

What are Class 1 primary NICs

Answer 8

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.

Question 9

What is the upper earnings limit, Primary Threshold and Lower earnings limit in relation to NICs?

Answer 9

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

Question 10

When calculating NICs for directors what must you do which differs to employees

Answer 10

For directors you use the annual NIC threshold

For employees you use the weekly NIC threshold

Question 11

What are fringe benefits?

Answer 11

They are employee benefits and can be treated as a benefit in kind depending on what it is

Question 12

When are Class 1A NICs payable

What happens if these are not paid by the employer?

Answer 12

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

Question 13

Class 1 Secondary NICs are not payable on employee aged under age of 21 or apprentices under 25? True or false

Answer 13

True but only if they earn under the Upper earning Limit

Above that limit, the employer would pay NICs at 13.8%

Question 14

NICs can be credited without the individual actually paying them

True or false

Answer 14

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

Question 15

The self-employed generally pay a lot lower NICs than employees.

True or false

Answer 15

True ( the self-employed are generally entitled to fewer benefits, however such as job seekers allowance)

Question 16

Self employed pay Class 2 and Class 4 contributions,

Which one builds entitlement to the state pension?

Answer 16

Class 2 only

Question 17

What are class 2 NICs

Answer 17

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!!

Question 18

EXAM TIP.

IF THERE IS A CLASS 4 NIC QUESTION ANNUAL RATE IS USED

Question 19

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?

Answer 19

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.

Question 20

LOOK AT 2.4. THIS SHOWS HOW BEING EMPLOYED BY MULITPLE COMPANIES AFFECTS NICS

Question 21

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

Answer 21

£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.

Question 22

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

Answer 22

£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.

Question 23

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.

Answer 23

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.

Question 24

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

Answer 24

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.

Question 25

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

Answer 25

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.

Question 26

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

Answer 26

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.