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After Start
Up
ABS is much more than just the leading Companies Formation Agent – we have a network of products and services that can help you running and developing your business.
ABS provides a full
range of
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NATIONAL INSURANCE
NI: the basics |
Introduction
Most people who work have to pay National Insurance contributions (NICs). National Insurance is distinct from income tax paid as an employed or self-employed individual.
NICs are collected by HM Revenue & Customs (HMRC) and go towards contributory benefits, such as a state pension and Jobseeker's Allowance. The class of NICs an individual pays can affect their entitlement to benefits.
This guide gives an overview of each class and how they apply in some typical circumstances.
National Insurance contribution types
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NIC type
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Who pays it?
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Basic explanation of NIC type
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Class 1 primary contributions
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Employees earning over the ET
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Employees pay Class 1 NICs at one rate on their gross earnings above the ET up to and including the UEL and at a reduced rate for earnings over the UEL. They are "deducted at source" from employee's salaries.
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Class 1 secondary contributions
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Employers, on the salaries of employees who earn above the ET
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Employers pay Class 1 NICs on their employees' gross earnings over the earnings threshold at a single rate. There is no UEL for employer's NICs. These are paid to HM Revenue & Customs (HMRC), usually on a monthly basis together with the employee's primary NICs.
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Class 1A contributions
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Employers
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Payable by employers on their employees' benefits in kind such as a company car or private medical insurance. These are calculated and paid annually.
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Class 1B contributions
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Employers
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Payable only by employers who have entered into a PAYE Settlement Agreement with HMRC to account for tax on certain expense payments and benefits.
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Class 2 contributions
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Self-employed
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Payable by the majority of self-employed individuals at a flat rate, either monthly or quarterly
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Class 3 contributions
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Voluntary
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Payable at a flat rate by those who have not paid enough NICs to qualify for certain benefits, such as a state pension.
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Class 4 contributions
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Self-employed
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Payable by self-employed individuals who have made a certain amount of profit in a year. Calculated annually using the self-assessment tax return form.
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National Insurance contributions for the self-employed
Self-employed people pay two types of National Insurance contributions (NICs) - Class 2 and Class 4.
Class 2 NICs
Most self-employed people pay Class 2 NICs.
You can apply for a certificate of exception if you:
- have expected earnings of less than £4,465 in 2006/07 (£4,635 in 2007/08)
- have reached state pension age (60 for women, 65 for men)
- are a married woman or widow entitled to reduced NICs
Self-employed people under 16 years old do not have to pay Class 2 NICs.
Class 2 NICs are set at a weekly rate of £2.10 in 2006/07 (£2.20 in 2007/08) and this can be paid to HM Revenue & Customs (HMRC) either monthly by direct debit or by quarterly bill.
Class 4 National Insurance contributions
Class 4 National Insurance contributions (NICs) are payable at 8 per cent on profits between £4,895 and £32,760 (for 2005/06) plus 1 per cent on any profit over that amount. For 2006/07 they are payable at 8 per cent of profits between £5,035 and £33,540 plus 1 per cent on any profit over that amount.
Class 4 NICs are calculated on your annual self-assessment tax return, and are payable on the trading profits on which you pay income tax. They are payable along with your income tax to HM Revenue & Customs (HMRC).
National Insurance contributions for employers and employees
Different types of National Insurance contributions (NICs) are calculated and collected in different ways, with differing responsibilities for how they are calculated and paid.
Class 1 NICs
Employers are responsible for calculating, deducting and paying Class 1 primary NICs (employees' contributions, to HM Revenue & Customs (HMRC) on behalf of all employees, including directors, earning above the earnings threshold. These must be deducted from their earnings.
Employers must also calculate and pay Class 1 secondary NICs (employers' contributions) for all employees earning above the earnings threshold. And employers must keep adequate records showing how NICs were calculated and what payments have been made for each employee. See our guide on Class 1 National Insurance contributions.
Class 1A NICs
Employers must calculate and pay Class 1A NICs due on taxable benefits given to employees, such as company cars or health insurance. These must be declared on form P11D annually and a copy given to the relevant employee by 6 July after the end of the tax.
Class 1B NICs
These are only paid by employers who have a PAYE (Pay As You Earn) Settlement Agreement with HMRC.
Class 3 NICs
These are paid voluntarily by individuals who want to protect their right to certain benefits, for which they have not yet made sufficient contributions. Individuals are responsible for finding out if they need to pay Class 3 NICs and for setting up a method of payment.
NICs thresholds for employees and employers
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NICs threshold
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Earnings per week
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Primary Class 1: Earnings threshold (ET)
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£97
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Secondary Class 1: Earnings threshold (ET)
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£97
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Primary Class 1: Lower earnings limit (LEL)
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£84
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Primary Class 1: Upper earnings limit (LEL)
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£645
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NICs rates for employees and employers
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Type
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Rate
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Primary Class 1: employees earning over the ET
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11 per cent of £97.01 to £645 per week and 1 per cent on all earnings above £645
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Secondary Class 1: Employees earning over the ET
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12.8 per cent of earnings above £97 per week
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Married women paying reduced rate NICs
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4.85 per cent of £97.01 to £645 per week and 1 per cent on all earnings above £645
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Employees' contracted - out rebate
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1.6 per cent
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Employers' contracted - out rebate (salary-related schemes)
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3.5 per cent
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Employers' contracted - out rebate (money-purchase schemes)
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1 per cent
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Class 3 National Insurance
Gaps in your National Insurance contributions (NICs) record can reduce the amount of state pension you receive when you retire. It also has implications for other state benefits, so it is worth making voluntary contributions to make up the difference.
These contributions are called Class 3 NICs. They are wholly voluntary and payable at a flat weekly rate.
You may have gaps in your NICs payment records if you have been unemployed and not claiming benefit, self-employed and holding a certificate of exception from Class 2 contributions or living abroad.
Class 3 NICs can be made by anyone wishing to make up gaps in their contributions record. By doing this, you can ensure that you qualify for a state pension and/or other benefits. These include basic retirement pension, widowed parent's allowance, bereavement payment, bereavement allowance, and child's special allowance.
Why you should pay Class 3 NI?
If you retire with less than 25 per cent of the qualifying years for a full pension:
- you will not receive any basic state pension
- you will also not be entitled to any refund of your National Insurance contributions (NICs), as they cover other insurance - such as sickness and unemployment as well as pension.
People who do not qualify for the full basic state pension, but who have more than 25 per cent of the qualifying years, will get a basic state pension between the minimum (£21.06 a weekin 2006/7, £21.82 in 2007/08) and the maximum (£84.25 a week in 2006/07, £87.30 in 2007/08). Class 3 NICs are paid at a flat weekly rate - which is £7.55 in 2006/07 and £7.80 in 2007/08. However, if you have a shortfall on your state pension contributions, the Pension Service may advise a voluntary National Insurance contribution at a different weekly rate.
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