NATIONAL INSURANCE

CONTRIBUTION

BY AVINASH
NATIONAL INSURANCE CONTRIBUTION (NIC)

• National Insurance Contributions (NIC) are taxes paid by employees and employers to
fund government benefits programs, including state pensions. The contributions are made
through payroll deductions
 CLASSES OF NATIONAL INSURANCE
CONTRIBUTIONS
Class of Basis of assessment Person
contribution liable
Class 1 A percentage based contribution levied on Employee
employee employee earnings in excess of the
employee threshold for the tax year 2019/20
of £8,632

Class 1 A percentage based contribution levied on Employer

employer's employee earnings in excess of the
employer's threshold for the tax year
2019/20 of £8,632
CLASSES OF NIC (CONTINUE)

Class 1A A percentage based contribution Employer

levied on
taxable employment benefits
provided to
employees
Class 2 A flat rate weekly contribution Self-employed
Class 4 A percentage based contribution Self-employed
levied on tax
adjusted trading profits in excess
of the lower
profits threshold £8,632 for the
tax year
2019/20
 Q/A

Nicholas has been self-employed for many years. He employs a full-time salesman and six
part-time employees. Nicholas’ tax adjusted trading profits for the tax year 2019/20 are
£86,000. The salesman earns a salary of £14,000 p.a. and is provided with a company car.
The remaining members of staff earn £3,000 p.a.
Explain which classes of NICs are payable by Nicholas
ANS

Nicholas will pay:

(1) Flat rate class 2 contributions in respect of his self-employed business.
(2) Class 4 contributions in respect of his self-employed business based on his tax adjusted trading profits as
they are in excess of
£8,632.
(3) Employer's class 1 contributions as Nicholas is an employer. The contributions are based on the
salesman’s salary of £14,000 as his earnings are in excess of £8,632.
(4) Class 1A contributions based on the assessable employment benefit arising from the provision of a
company car to the salesman.
NICS PAYABLE IN RESPECT OF EMPLOYEES

 Class 1 employee contributions

 Class 1 employer's contributions
 Class 1A contributions.
CLASS 1 EMPLOYEE AND EMPLOYER'S NICS

Both the class 1 contribution paid by the employee and the class 1 contribution paid by the
employer are a percentage based contribution levied on the ‘gross earnings’ of the employee
in excess of the earnings threshold. The earnings threshold for the tax year 2019/20 is
£8,632.
THE DEFINITION OF EARNINGS FOR CLASS 1 NIC
PURPOSES
Earnings’ for the purpose of class 1 NICs consists of:
 any remuneration derived from the employment, which is
 paid in cash or assets which are readily convertible into cash.
The calculation of class 1 NICs is based on:
gross earnings with no allowable deductions
Gross earnings include:
 wages, salary, overtime pay, commission or bonuses
 sick pay, including statutory sick pay
 tips and gratuities paid or allocated by the employer
 reimbursement of the cost of travel between home and work
 vouchers (exchangeable for cash or non-cash items, such as goods).
DOES NOT INCLUDE

 exempt employment benefits (e.g. employer contributions into a pension

scheme, a mobile phone, etc.)
 tips directly received from customers
 expenses paid for or reimbursed by the employer for which an income tax
deduction would be available e.g. employment related travel and
subsistence costs.
RELEVANT EMPLOYEES

Class 1 contributions are payable where the individual:

 is employed in the UK, and
 is aged 16 or over, and
 has earnings in excess of the earnings threshold (£8,632 for 2019/20)
CLASS 1 EMPLOYEE CONTRIBUTIONS

Class 1 employee contributions are also known as primary contributions and

are payable by employees:
 aged 16 or over until

 attaining state pension age.

Note that class 1 employee contributions:

 are not an allowable deduction for the purposes of calculating the

individual employee’s personal income tax liability

 do not represent a cost to the business of the employer, as they are

ultimately paid by the employee. Therefore, they are not a deductible

expense when calculating the employer’s tax adjusted trading profits.

STATE PENSION AGE

Up to 5 April 2010 the state pension age was 65 for men and 60 for women. Between 2010
and 2018 the state pension age for women gradually increased to 65 and from 2018
onwards the state pension ages for both men and women are further increasing. Knowledge
of the detailed rules over this transitional period is not required.
CALCULATING CLASS 1 EMPLOYEE
CONTRIBUTIONS
Employee contributions are normally calculated by reference to an employee’s earnings
period:
 if paid weekly, the contributions are calculated on a weekly basis
 if paid monthly, the contributions are calculated on a monthly basis.
The employee contributions payable are calculated as:
 12% on gross earnings between £8,632 and £50,000
 2% on gross earnings in excess of £50,000.
EARNINGS PERIOD

The annual earnings thresholds can be used to calculate the rate of class1 NICs payable
where the employee’s earnings do not fluctuate during the year.
However, where an employee’s earnings fluctuate during the year:
 the calculations must be performed on an earnings period basis
 the annual thresholds are divided into weekly or monthly thresholds.
For example, the monthly upper threshold would be £4,167 (£50,000 × 1/12)
CLASS 1 EMPLOYER'S CONTRIBUTIONS

Class 1 employer's contributions, also known as secondary contributions are payable by

employers in respect of employees:
 aged 16 or over
 until the employee ceases employment.
There is no upper age limit for employer's contributions, the employer is liable even if the
employee's age exceeds state pension age.
Employer's contributions are an additional cost of employment and are a
deductible expense when calculating the employer’s tax adjusted trading profits.
CALCULATING CLASS 1 EMPLOYER'S CONTRIBUTIONS

Employer's contributions are calculated by reference to an employee’s earnings period.

Employer's contributions are calculated as:
 13.8% on all gross earnings above £8,632.
Note that there is:
 no upper earnings threshold
 no change in the rate of NICs payable for employer's contributions.
COMPANY DIRECTORS

Special rules apply to company directors to prevent the avoidance of NICs by paying low
weekly or monthly salaries, and then taking a large bonus in a single week or month.
Therefore, when an employee is a company director, his class 1 NICs are calculated as if he
had an annual earnings period, regardless of how he is paid (e.g. monthly, weekly)
PAYMENT OF CLASS 1 CONTRIBUTIONS

The administration and payment of class 1 NICs is carried out by the employer
as follows:
 The employer is responsible for calculating the amount of class 1 employee and employer's contributions at each pay
date.
 Employee contributions are deducted from the employee’s wages or salary by the employer and paid to HMRC on the
employee’s behalf.
 The total employee and employer's contributions are payable by the employer to HMRC, along with income tax
deducted from the employees under PAYE.
 The payment is due on the 19th of each month (i.e. due not later than
14 days after the end of each PAYE month).
• However, most businesses pay electronically and are allowed an
extra 3 days to pay. Therefore the payment is normally due on the
22nd of each month.
NIC EMPLOYMENT ALLOWANCE

Employers are able to claim up to £3,000 relief p.a. from their class 1 employer's NIC
payments.
Note that the allowance:
 cannot be used against any other classes of NICs (e.g. class 1A)
 is claimed through the real time information (RTI) PAYE system
 is not available to companies where a director is the sole employee.
CLASS 1A NICS

Employers are required to pay class 1A contributions on taxable benefits

provided to employees.
No class 1A contributions are payable in respect of:
 exempt benefits (i.e. those benefits which are exempt from income tax
(see Chapter 5)).
 benefits already treated as earnings and assessed to class 1 NICs
The contributions are calculated as:
 13.8% on the value of the taxable benefits.
Class 1A contributions are an additional cost of employment and are a
deductible expense when calculating the employer’s tax adjusted trading profits
PAYMENT OF CLASS 1A CONTRIBUTIONS

Class 1A contributions are payable to HMRC by 19 July following the end of the
tax year (i.e. by 19 July 2020 for the tax year 2019/20).
However, most businesses pay electronically and therefore pay by 22 July
following the end of the tax year.
3 NICS PAYABLE IN RESPECT OF SELF-EMPLOYED INDIVIDUALS

The following NICs are payable by self-employed individuals:

 Class 2 contributions
 Class 4 contributions
CLASS 2 CONTRIBUTIONS

Class 2 contributions are payable where the individual:

 is aged 16 or over
 until attaining state pension age
 if the tax adjusted trading profits of the business for the tax year exceed
the small profits threshold of £6,365.
AMOUNT PAYABLE

Class 2 contributions are a flat rate payment of £3.00 per week.

The maximum total class 2 NICs payable for the tax year 2019/20 is therefore
£156 (£3.00 × 52 weeks).
Note that class 2 contributions:
 are not an allowable deduction for the purposes of calculating the
individual’s income tax liability
 are not a deductible expense when calculating the business’ tax adjusted
trading profits.
CLASS 4 CONTRIBUTIONS

In addition to class 2 NICs, a self-employed individual may also be liable to

class 4 NICs.
Class 4 contributions are payable by self-employed individuals who:
 at the start of the tax year, are aged 16 or over.

They continue to pay until:

 the end of the tax year in which they reach state pension age.
Class 4 NICs are a percentage based contribution levied on the ‘profits’ of the
individual in excess of £8,632 for the tax year 2019/20.
CALCULATING CLASS 4 NICS

The contributions payable are calculated as:

 9% on profits between £8,632 and £50,000.
 2% on profits in excess of £50,000.
PAYMENT OF CLASS 4 CONTRIBUTIONS

Class 4 contributions are paid to HMRC at the same time as the individual’s
income tax payments.
Income tax and class 4 NICs due are collected by HMRC through the self assessment
system.
TOTAL NICS PAYABLE BY A SELF-EMPLOYED
INDIVIDUAL
A self-employed individual pays:
 both class 2 and class 4 NICs in respect of his trading profits.
In addition, if the self-employed individual employs staff, they will also be
required to account for:
 class 1 employee, class 1 employer's and class 1A NICs in respect of
earnings and benefits provided to employees.
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