Section 2 - National Insurance Contributions Flashcards
Factors determining NICs
Employment Status
Age
Level of earnings
Residence Status
NIC Classes
Class 1/1A - Employee and employer (1A, Employer only)
Class 2 - Self-Employed (flat-rate)
Class 3 - Voluntary (flat-rate)
Class 4 - Self-employed (percentage rate)
Class 1 NIC
Earnings - regular salary, bonus, maternity/sick pay paid by employer
Share Options:
- NIC is paid on shares that can be converted into cash acquired under unapproved share option schemes
- No NIC is paid on shares acquired under approved share option schemes
Contributions not deducted from pay prior to calculating income tax
Employer contributions are deducted from profits for tax purposes
Employee NICs only payable to State Pension Age
NICs are based on pay periods, e.g. weekly, monthly
- Not based on tax year
Contribution Thresholds for 2022/23 (per week)
No NIC is paid below threshold
Primary Contribution Threshold:
- £190 (pre 6th July)
- £242 (post 6th July)
- Employee pays class 1 above this level
Secondary Contribution Threshold:
- £175
- Employer pays class 1 above this level
Lower Earnings Limit (LEL):
- £123
- Min. earnings for employee to be entitled to state benefits (e.g. State pension)
- If below this you will not be entitled to state pension
Upper Earnings Limit (UEL):
- £967
- Max. earnings on which employee pays NIC at main rate
Upper Limit for 0% employer rate is £967 for following groups:
- Upper Secondary Threshold for Under 21s (UST) - Under 21s
- Apprentice Upper Secondary Threshold (AUST) - Apprentices under 25
- Veterans Upper Secondary Threshold (VUST) - Veterans in first year of civilian employment
Freeport Upper Secondary Threshold (FUST):
- £481 pw
- qualifying employees working in freeports for first 3 years
Rates of Class 1 NICs
Employee:
First £190/£242 pw = £0
Then to £967 pw = 13.25%
Above £967 pw = 3.25% (additional primary percentage)
Employer:
First £175 pw = £0
over £175 pw = 15.05% (no ceiling)
Employment Allowance - NIC
Employers allowance - £5,000 per year
Deducted from total secondary contributions
Employee contributions unaffected
Designed to support employment
Not available:
- where director sole employee
- if last tax year’s NI bill over £100,000
Associated Employments - NICs
I.e. Employee works several jobs
Earnings must be aggregated
Stops earnings being below each threshold in each job - hence not making any NIC
Married Women - Reduced Rate - NIC
Pre 06/04/1977, married women/widows could elect to pay reduced rates
Employee earning £190/£242 to £967 pw = 7.1%
Above £967 pw = 3.25% (additional primary percentage)
Revoked on divorce, remarriage, earnings less than the LEL for two tax years in a row and no self-employed earnings
NIC Credits
If Individuals aren’t paying NIC, their record is credited as if min. contributions have been paid if:
- They are unemployed/sickness and claiming certain benefits
- They are on approved training course
- They have income below the Primary Contribution Threshold, but above the LEL
- They are during a period where they are entitled to statutory maternity, paternity, shared parental and adoption pay
NIC Planning Issues - Avoiding High NIC Liability
NIC liability can be high for employers as there is no upper limit
Businesses and Companies:
- More scope for basic tax planning when spouse/partner works in business
- Salary of £123 to £190/£242 pw qualifies for state pension without paying NIC
- Pension Contributions are allowable business expense
- Share profits by operating a partnership
- If ltd company then spouse/partner can become shareholder and receive dividends
Directors and Employees:
- Dircetor of own company has control over income and scope of tax planning
- Choose bonus (employee only) or dividend
- Consider tax position of share options
- Consider taking dividends instead of remuneration
- Dividends don’t count as earnings for pension contributions
- Company cars and free fuel for cars with low CO2 emissions may be tax efficient, otherwise check to see if worthwhile benefit
- Increase employer pension contributions by salary sacrifice
Class 1A NIC
Taxable employee benefits subject to Employer NICs but not employee NICs, e.g. company cars
Single rate of 15.05%
Collecting Class 1 NICs
Class 1 normally collected through PAYE with tax
Employer responsible for calculations
Late/Non-payments subject to penalties from HMRC
Overseas NIC Issues - Class 1
EEA (European Economic Area) Regulations:
- Employees who are EEA nationals should pay social security contributions in only one state
Employer contributions normally payable in same country as employee contributions
Temporary UK worker in EU/Norway can ask HMRC for certificate to allow them to pay UK NIC for 2 years (Norway 3 years) - not available in Liechtenstein/Iceland
Outside EEA, NICO (National Insurance Contribution Office) normally attempts to collect primary contributions if employee coming to work in UK on a regular basis
NICO will collect NICs for 52 weeks if employee going abroad to work but employer is UK based
Max. NICs in Multiple Employments
Upper limit on the amount of class 1 NICs at main rate that any individual has to pay in a single tax year.
Maximum is 53 x primary class 1 contributions at the UEL at main rate (£967 per week x 53 weeks = £50,270 per tax year)
Employees with more than 1 job who might pay above max. limit can apply for deferment in one of the employments
NIC Repayment
No automatic right to repayment in event of excess contribution
Company Directors - NIC
Often paid irregular amounts at irregular intervals
Annual earnings period used
When earnings are paid the total earnings since the start of the tax year must be considered when calculating NICs
Self-Employed - Class 2 and Class 4 NICs
Self-employed pay lower NIC than employees
However, they receive fewer state benefits
Class 2 NIC
Gives entitlement to contributory state benefits
Flat rate - not earnings related
Deemed paid without individual actually having to pay where earnings are between small profits threshold of £6,725 and LEL of £11,908
Earnings for tax year are net profits shown in accounts
If earnings below £6,725 can choose not to pay though may miss out on state pension
No credit if self-employed earnings are too low
Class 4 NIC
Does not give any entitlement to state benefits
Earnings related
Charged for tax year on profits assessed for income tax for that year
Loss from the previous year can be brought forward to reduce Class 4 payable
NIC - Class 2 & 4 Rates
Class 2:
- Weekly flat rate £3.15
Class 4:
- Main rate = 10.25%
- Lower Annual Limit = £11,908
- Upper Annual Limit = £50,270
- Additional rate on earnings above upper limit = 3.25%
Collecting Class 2 & 4 NICs
Class 2:
- Included in self-assessment
- no payments on account
- due on 31st January following the end of the tax year they relate to (e.g. 31st Jan 2024 for 22/23 tax year)
Class 4:
- Included in self-assessment
- 2 payments on account and balancing payment
‘Payments on account’ are advance (future) payments towards your tax bill
NIC Overseas Issues - Class 2 & 4
Class 2:
- Paid if UK resident
Class 4:
- Not due unless definitely UK resident and self-employed within UK
Annual Max. NICs
If employed and self-employed may have to pay at main rate on both sets of earnings
Max. limits set to prevent excess liability
No limit on NIC payable at 2% additional rate liability
Class 1 + Class 2: £5,082.96 (£50,270 - £11,908 = £38,362 *13.25% = £5,082.96)
Class 2 + Class 4: £4,095.90 (Class 2: £3.15 *12 = £163.80. Class 4: £50,270 - £11,908 = £38,362 * 10.25% = £3,932.10. £163.80 + £3,932.10 = £4,095.90)
Class 3 NIC - Voluntary Contributions
Fill gaps in contribution record
Subject to residence condition
Can be paid up to 6 years after tax year in which they relate
NIC Summary
NIC are significant liability for employers as no upper limit
Company owners could pay out profits as dividends (not earnings for NIC purposes)
Salary between £6,396 and £11,908 means accrue entitlement to new State Pension without paying any employee NICs
