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    CHAPTER 8. NICs

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    Amanda Ruseir
    The document summarizes different classes of UK national insurance contributions (NICs) paid by employees, employers, and self-employed individuals. It discusses Class 1 NICs paid by employees and employers, Class 1A paid by employers, and Class 2 and Class 4 paid by self-employed individuals. Payment rates and thresholds for each class are provided. Examples are also included to demonstrate how to calculate NICs for different employee scenarios.

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    CHAPTER 8. NICs

    Uploaded by

    Amanda Ruseir
    45 views32 pages
    The document summarizes different classes of UK national insurance contributions (NICs) paid by employees, employers, and self-employed individuals. It discusses Class 1 NICs paid by employees and employers, Class 1A paid by employers, and Class 2 and Class 4 paid by self-employed individuals. Payment rates and thresholds for each class are provided. Examples are also included to demonstrate how to calculate NICs for different employee scenarios.

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    NICs tax principle in UK

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    CHAPTER 8. NICs.pptx

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    The document summarizes different classes of UK national insurance contributions (NICs) paid by employees, employers, and self-employed individuals. It discusses Class 1 NICs paid by employees and employers, Class 1A paid by employers, and Class 2 and Class 4 paid by self-employed individuals. Payment rates and thresholds for each class are provided. Examples are also included to demonstrate how to calculate NICs for different employee scenarios.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    45 views32 pages

    CHAPTER 8. NICs

    Uploaded by

    Amanda Ruseir
    The document summarizes different classes of UK national insurance contributions (NICs) paid by employees, employers, and self-employed individuals. It discusses Class 1 NICs paid by employees and employers, Class 1A paid by employers, and Class 2 and Class 4 paid by self-employed individuals. Payment rates and thresholds for each class are provided. Examples are also included to demonstrate how to calculate NICs for different employee scenarios.

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    © All Rights Reserved
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    You are on page 1of 32

    CHAPTER 8

    NATIONAL INSURANCE
    CONTRIBUTIONS
    MSc. Nguyen Thuy Trang
    Academy of Finance
    2

    CONTENTS
    8.1. Classes and payment of national insurance
    contributions (NICs)
    8.2. Class 1 NICs
    8.3. Class 1A NICs
    8.4. Class 2 and Class 4 NICs
    3

    8.1. Classes and payment of NICs


    4

    8.1.1. What are NICs?


    NICs are paid by self-employed individuals, employees
    and their employers. The contributions are used to bear
    part of the liability of the government to pay state
    benefits (for example, jobseeker’s allowance and state
    pensions)
    5

    8.1.2. Classes of NICs


    » Class 1 paid by employees and their employers
    » Class 1A paid by employers
    » Class 2 paid by self-employed individuals
    » Class 4 paid by self-employed individuals
    6

    8.1.3. Payment of NICs


    » NICs are administered by the National Insurance Contributions Office (NICO) which is
    part of HMRC.
    » You have already seen that Class 1 contributions are collected under the PAYE system
    on a monthly basis.
    » Class 1A contributions are payable by 22 July following the end of the tax year to which
    they relate.
    » Class 2 contributions come within the self-assessment system.
    » Class 4 contributions are collected together with income tax under the self-assessment
    system.
    7

    8.2. Class 1 NICs


    8

    8.2.1. Introduction
    » An employed individual is liable to Class 1 primary NICs. The
    employer is liable to Class 1 secondary NICs.
    » The amount of Class 1 NICs payable depends on the age of the
    employee and the level of the employee's earnings in the 'earnings
    period'.
    » All employees aged between 16 and state pension age are liable
    to pay Class 1 primary NICs. Payments start on the employee's
    16th birthday and cease when the employee reaches state
    pension age.
    9

    Introduction
    » State pension age: The age at which an individual is
    entitled to received the basic state pension and cease
    paying NICs.
    Since October 2020, the state pension age for both
    men and women has been 66.
    10

    8.2.2. Earnings for Class 1 NICs


    » An employee's earnings for Class 1 NIC purposes
    include all earnings received in monetary form: salary,
    commission, bonus plus vouchers exchangeable for
    cash, goods or services. Earnings do not usually
    include any taxable benefits.
    » Most employees are paid at regular intervals (weekly or
    monthly). This period is the earnings period.
    11

    8.2.3. Primary Class 1 contributions


    Employee’s earnings Primary contribution payable
    Not above primary threshold (PT)
    From 6 April 2022 to 5 July 2022: £190 per week, £823
    per month or £9,880 per year Nil
    From 6 July 2022 to 5 April 2023: £242 per week,
    £1,048 per month or £12,570 per year
    Between PT and upper earnings limit (UEL)
    Earnings less PT x 13.25%
    (£967 per week, £4,189 per month or £50,270 per year)
    UEL less PT x 13.25%
    In excess of UEL plus
    Earnings less UEL x 3.25%
    12

    Example
    Meg is employed by Green Ltd and is paid weekly. She
    earns £424 in the first week of May 2022.
    Munroe is also employed by Green Ltd and is paid
    monthly. He earns £4,800 in December 2022.
    Requirement
    What are the Class 1 primary contributions of Meg and
    Munroe respectively of these earnings periods?
    13

    8.2.4. Secondary Class 1 contributions


    » For employees aged 21 or over:

    Secondary contribution
    Employee’s earnings
    payable
    Not above secondary threshold
    (ST)
    Nil
    (£175 per week, £758 per
    month or £9,100 per year)
    Above ST Earnings less ST x 15.05%
    14

    8.2.4. Secondary Class 1 contributions


    » For employees aged under 21 years old:

    Secondary contribution
    Employee’s earnings
    payable
    Not above upper secondary
    threshold (UST)
    Nil
    (£967 per week, £4,189 per
    month or £50,270 per year)
    Above UST Earnings less UST x 15.05%
    15

    8.2.4. Secondary Class 1 contributions


    » For employees classed as apprentices and aged
    under 25 years old:
    Secondary contribution
    Employee’s earnings
    payable
    Not above apprentice upper
    secondary threshold (AUST)
    Nil
    (£967 per week, £4,189 per
    month or £50,270 per year)
    Above AUST Earnings less AUST x 15.05%
    16

    Example
    Meg is employed by Green Ltd and is paid £424 weekly.
    Munroe is also employed by Green Ltd and is paid
    £4,800 monthly.
    Requirement: Calculate the weekly and monthly
    secondary Class 1 contributions payable by Green Ltd
    in respect of Meg and Munroe respectively. Ignore
    Green Ltd's employment allowance. Meg and Munroe
    are aged over 21 and not apprentices.
    17

    Example
    Oliver, aged 18, is employed by Blue Ltd and is paid £424
    weekly.
    Nora, aged 19, is also employed by Blue Ltd and is paid £4,800
    monthly.
    Kieran, aged 22, is employed by Blue Ltd as an apprentice and is
    paid £4,500 monthly.
    Requirement: Calculate the weekly (for Oliver) and monthly (for
    Nora and Kieran) secondary Class 1 contributions payable by
    Blue Ltd in respect of these employees. Ignore Blue Ltd's
    employment allowance.
    18

    Example
    Chloe is an employee of Cyan Ltd. She earns an annual
    salary of £26,196 which is paid monthly on the last
    working day of the month. In November 2022, she
    receives a bonus of £4,415.
    Requirement: Compute the Class 1 contributions
    payable in respect of Chloe's employment for 2022/23.
    Ignore the employment allowance.
    19

    8.2.5. Employment allowance


    » The total secondary Class 1 NICs of most employers is reduced by £5,000 per year
    (2022/23).
    » This is an allowance per employer, not per employee. If the employer's total
    secondary Class 1 NIC liability for all employees is less than £5,000 for 2022/23,
    the employer pays no secondary Class 1 NIC for the year.
    » The employment allowance is not available to companies with a single director and
    no other employees. Neither is it available for businesses whose total Class 1
    Secondary NIC liability was £100,000 or over in the previous year.
    20

    8.3. Class 1A NICs


    21

    8.3.1. Class 1A contributions


    » Employers are also liable to pay Class 1A contributions on
    taxable benefits provided to employees at the rate of 15.05%.
    » The value of the taxable benefits for NICs is generally the
    same as the taxable value for income tax. However, any
    benefits taxed as earnings under Class 1 are not also subject
    to Class 1A charge.
    22

    Example
    Beryl is employed by Z plc. During 2022/23, she received the following
    benefits:
    Medical insurance £810
    Car benefit £3,500
    Vouchers exchangeable for goods £750
    Pension advice (available for all employees) £100
    Beryl is a higher rate taxpayer.
    Requirement: Calculate the Class 1A contributions payable by Z plc.
    23

    8.4. Class 2 and Class 4 NICs


    24

    8.4.1. Introduction
    » Self-employed taxpayers are liable to both Class 2 and
    Class 4 NICs. Class 2 is paid within the
    self-assessment regime.
    » Class 2 payments count towards an individual's
    contributions record, while Class 4 payments do not.
    25

    8.4.2. Class 2 NICs


    » A self-employed individual aged between 16 and state pension
    age is required to pay Class 2 contributions (equivalent of £3.15
    per week of self-employment for 2022/23).
    » Payments start on the individual's 16th birthday and cease
    when the individual reaches state pension age.
    26

    8.4.2. Class 2 NICs


    » Lower profits limit: No Class 2 contributions are
    required if the individual's profits are below the
    lower profits limit (£11,908 for 2022/23).
    27

    8.4.3. Class 4 NICs


    In addition to the flat rate Class 2 liability, self-employed
    individuals may also be liable to pay Class 4 NICs based on
    their taxable trading profit.
    28

    8.4.3. Class 4 NICs


    Employee’s earnings Class 4 contribution payable
    Not above lower profits limit
    Nil
    (£11,908)
    Between lower profits limit and upper
    Earnings less lower profits limit x
    profits limit
    10.25%
    (£50,270)
    Upper profits limit less lower profits
    limit x 10.25%
    In excess of upper profits limit plus
    Earnings less upper profits limit x
    3.25%
    29

    Example
    Andreas has been self-employed for many years. His
    accounts to 5 April 2023 showed a taxable profit of
    £12,200.
    Requirement: What are the Class 2 and Class 4 NICs
    payable by Andreas for 2022/23?
    30

    Example
    Nisar is self employed. He makes up accounts to 31 December
    each year. His taxable trading profit for the year ended 31
    December 2022 is £58,000 and he estimates his taxable
    trading profit for the year to 31 December 2023 will exceed this
    figure.
    Requirement
    Compute the Class 2 and Class 4 NICs payable by Nisar for
    2022/23.
    31

    8.4.4. Registering to pay self-employed NICs


    To avoid penalties, registration must be made in time
    for a return to be issued for completion, submission
    and payment of any liability due by 31 January
    following the tax year during which self employment
    commenced.
    32

    THE END

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