NIC for Employees
For employees Class1 National Insurance (NI) contributions are deducted from their salary each month as part of the PAYE system.
It is normally paid on earnings between £100 and £670 per week at 11% and then 1% on any earnings above this.
The rate of NIC paid by employees is affected by whether you are contracted out of SERPS (the State Earnings-Related Pension Scheme) in which case a reduced rate is payable.If the employer has contracted out of SERPS and into a salary-related scheme, then at the basic level the NIC rates are reduced by 1.6% for the employee and 3.7% for the employer. For money-purchase schemes, the employee's reduction is still 1.6%, but the employer's reduction is 1.4% and an additional age-related payment is made to the scheme by the NICO.
However, if an an employee contracts out of SERPS into a personal pension, the full NI contribution has to be paid, but a rebate is then paid by the NICO to the pension provider.
NIC for Employers
Class 1A contributions are paid by the employer based on the employees' salary and is payable on most forms of payment and benefits provided to the employee. The employer pays 12.8 percent on all the employee's income above £100 per week.
Self Employment NIC
When you become self-employed you have two types of national insurance that are payable...
- Class 2 contributions, amount to £2.20 per week and are payable if you earn more than £4,635 per year. They can be paid by monthly Direct Debit or quarterly by bill. They provide only very basic cover for state benefits. You get the basic retirement pension but not the earnings related pension. You may also claim incapacity benefits but not industrial injuries benefit.
- Class 4 contributions on the taxable profit you make between £5,225 and £34,840 per annum. The rate is 8% of that profit and 1% above this.
The good news is that this is less than you would pay as an employee where the rate is usually 11% at these levels and 1% after that.
Voluntary National Insurance
Class 3 National Insurance is a voluntary contribution at the flat-rate contributions of £7.80 per week and can be paid by people to keep up their national insurance record for the retirement pension and some other benefits, when they haven't paid enough of any of the other forms of contribution.
Summary
- Class 1 is paid by employees;
- Class 1A is paid by employers;
- Class 2 is paid by the self-employed;
- Class 3 is a voluntary contribution to make up any deficits;
- Class 4 is paid by the self-employed if they earn enough.
How We Can Help You
National Insurance can be a complex area and HM Revenue & Customs have wide powers. We can assist you with compliance and taking advantage of NIC planning opportunities.
Got a Question?
If you have any queries on any of the above, please ask a question
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