National Insurance Contributions (NIC)

Employees

Most employees under state pension age pay Class 1 contributions.   The primary contribution is by employee and the secondary contribution is by employer. They are percentage based contributions levied on gross earnings in excess of a certain sum.

Earnings are all earnings paid in cash or readily convertible to cash.  NIC are paid on gross earnings with no deductions. This does not include certain exempt employment benefits  and reimbursed business expenses and cash benefits which are not readily convertible. Benefits such as contributions into a pension scheme, workplace nurseries, mobile phones are not subject to NIC.  Remuneration readily convertible into cash includes vouchers and shares and unit trusts.

An employee’s Class 1 National Insurance is made up of contributions:

• deducted from their pay (employee’s National Insurance)
• paid by their employer (employer’s National Insurance)

NIC are payable where an individual is employed in the UK , over 16 and whose earnings are in excess of the lower threshold of £162  per week (p/w) (2018). They are payable between aged 16 and 65. The rate for most employees (Class 1 Category A) is 12% on £162 to £892 p/w and 2% over £892 p/w.

Secondary contributions are payable by employers in respect of employees over the age of 16 and until cessation of employment.  They are still payable when an employee is over pensionable age. Secondary contributions are 12.8% of all gross earnings over 162 p/w (2018).

Employers must deduct primary contributions and pay secondary contributions on each weekly or monthly pay date.  They are payable to HMRC along with income tax under PAYE.  It is normally due on the 19th of each month. Employers are required to pay Class 1A contribution on taxable benefits (such as motor cars).

Class 1 contributions are paid by employees between the ages of 16 and 65 in the case of men and 16 and 60 in the case of women. The lower earnings limit is £84 per week. The upper earning limit is £645.

Employees who haven’t contracted out of the second state pension pay a contribution of 11 percent of earnings between the primary threshold (£97 a week) and the upper earning limit and one percent on earnings above the upper earning limit.

Persons who have contracted out take contributions of 9.4 percent up to the upper earnings limit and one percent above.

Class 1 contributions give entitlement to all contributory benefits.

Self Employed

Self employed individuals pay Class 2 and Class 4 contributions.  Class 2 contributions are a flat payment of £2.95 per week where profits / income  exceed the threshold of £6,205  per annum.

Class 2 contributions are paid by self-employed persons whose earnings exceed £4,465. They give access to contributory benefits except jobseekers allowance (contributory). Self-employed persons do not qualify for the state second pension.

Class 3 contributions are voluntarily contributed, designed to enhance entitlement to the basic state pension. Class 4 contributions are paid by self-employed persons. They are paid at 8 percent on profit between £5,035 and £33,540 and one percent there over.

Class 4 contributions are paid by individuals over 16 until retirement age on earnings above the low profits / income  threshold of £8,424 per annum.

They are payable when the individual is over 16 until normal retirement age. These are based on a 9% of profits over £8,243 and under £46,350 and 2% of profits over this latter amount.

They are not a deduction allowed for income tax purposes. Profits for the purpose of Class 4 NIC consist of taxable trading profits after deducting trading losses and charges.

NIC contributions are payable to HMRC at the same time as the individuals income tax contribution under self assessment.

There are rules for company directors to prevent avoidance of NIC by payment of lower salaries. The rules aggregate salary from difference sources.

National insurance benefits depend on having made sufficient contributions by way of national insurance contributions. See the section on UK National Insurance.

Contributions may be paid or credited. Persons on jobseeker’s allowance sign on as available for work, obtain class 1 credits as do persons who are incapacitated for work in certain circumstances.

Persons receiving benefits for children under 16 or in income support but not required to sign on because of caring for an invalid at least 35 hours a week, 48 hours here obtain credits towards the basic retirement pension.