National Insurance accounts for 17.60% of government revenue in the tax year 2021/22. The National Insurance Contribution Office (NICO), part of HMRC, collects National Insurance contributions. PAYE and other HMRC systems help NICO collect National Insurance contributions.
National Insurance contributions fund state pensions, jobseeker’s allowance, and employment and support allowance. NICO receives a Treasury grant if National Insurance contributions are insufficient to cover these benefits.
Contributions to National Insurance are a tax on earnings and self-employment income paid by employees, employers, and the self-employed. Whether you are employed or self-employed, they can contribute to your eligibility for benefits such as the State Pension and Maternity Allowance.
In addition, some social security benefits will depend on sufficient National Insurance Contributions being paid.
Factors Affecting National Insurance Contribution
National Insurance (NI) in the UK is a social security tax that is paid by most workers and employers. The amount of National Insurance that you pay depends on a number of factors, including:
- Earnings: The amount of NICs that an individual pays is generally based on their earnings. Employees and self-employed individuals pay NICs on their earnings above a certain threshold. The threshold varies depending on whether the individual is employed or self-employed and is typically reviewed annually.
- Employment status: Different NICs rules apply depending on whether an individual is employed or self-employed. For example, self-employed individuals generally pay a different rate of NICs than employees.
- Age: Individuals who have reached state pension age are not required to pay NICs, regardless of their employment status.
- Employment benefits: Some employment benefits, such as company cars and health insurance, can affect the amount of NICs that an employee pays.
- Working hours: Individuals who work part-time may pay lower NICs than those who work full-time, as the earnings threshold for NICs is pro-rated based on the number of hours worked.
Liable for National Insurance Contribution
The majority of employees over the age of 16 who earn over a certain threshold are required to pay Class 1 National Insurance Contributions (NICs), which are deducted from their pay by their employer and paid to HM Revenue and Customs (HMRC) along with tax due. The Class 1 NICs threshold for the 2023/24 tax year is £9,880 per year.
Class 2 and Class 4 NICs are different types of contributions that self-employed individuals must pay. Class 2 National Insurance Contributions are a weekly flat rate contribution paid by self-employed individuals with annual profits exceeding £6,725. Class 4 National Insurance Contributions are payable by self-employed businesses with an annual profit exceeding £12,570.
Individuals and employers must understand their responsibilities for paying NICs and ensure they are paid accurately and on time. Failure to pay National Insurance Contributions can result in penalties and interest charges from HMRC, as well as a reduction in eligibility for benefits such as the State Pension.
Types of National Insurance Contribution
At present, there are six classes of National Insurance:
- Class 1 – paid by both employees and employers on earnings from employment.
- Class 1A – paid by employers only on benefits provided to employees.
- Class 1B – paid by employers only on PAYE Settlement Agreements (PSAs).
- Class 2 – a flat rate, the weekly amount paid by self-employed persons.
- Class 3– voluntary contributions paid by taxpayers who wish to top-up their contribution record in order to preserve their entitlement to state benefits.
- Class 4 – paid by self-employed persons on the profits from their trade.
National Insurance Contribution for Employee
For employees, National Insurance Contributions mean that a percentage of their earnings will be deducted from their salary each month. These contributions go towards funding various state benefits, such as the State Pension and Maternity Allowance.
The amount of NICs an employee pays also affects the amount of State Pension they will receive when they retire. The more NICs an employee pays over their working life, the more State Pension they will receive.
National Insurance Contribution for Employer
For employers, National Insurance Contributions mean that they have to pay a percentage of their employee’s earnings to the government each month. This can be a significant cost for businesses, especially if they have a large number of employees.
Employers also have to keep track of their employee’s earnings and ensure that they are paying the correct amount of NICs. Failure to do so can result in fines and penalties from HM Revenue and Customs (HMRC).
What is Earning from Employment for National Insurance Contribution?
Class 1 National Insurance contributions (NICs) are paid on earnings from employment by both employees (primary contributions) and employers (secondary contributions).
Earning include:
- Cash payment (other than reimbursement of genuine business expenses)
- Payment in Kind that can be surrendered for cash.
- Readily convertible assets
- Settlement of employee’s personal liability
- Vouchers (except childcare to the extent it does not exceed the exempt amounts)
Employment Allowance
An eligible employer may claim a reduction of up to £5,000 per tax year in secondary Class 1 NICs. The maximum relief available is £5,000. Consequently, if the secondary Class 1 NICs liability for the year is less than this threshold, the employer is exempt from paying Class 1 NICs.
There is no provision for carrying over unused relief to the following tax year. The allowance can be claimed by sole proprietors, partnerships, and corporations.
In order to qualify for the allowance, the employer’s Class 1 NICs liability for the preceding tax year must have been less than £100,000. If the employer is part of a group of companies, the total Class 1 NICs liability for the group in the previous tax year must have been less than £100,000, and only one company in the group can claim the allowance.
In addition, the employment allowance is factored into the total de minimis State Aid a company is permitted to receive over a three-year period. Employment allowance cannot be claimed if the de minimis State Aid threshold for the relevant business sector would be exceeded if the full employment allowance was claimed.
Maximum Payment
If a person has multiple employments, the primary Class 1 NICs will be calculated separately for each employment. However, there is a maximum amount payable, and any amount paid in excess of this maximum will be refunded. The maximum amount ensures that a person with two or more jobs does not pay more NICs than a person with a single job earning the same amount.
The maximum amount is not fixed and will fluctuate based on the combination of employment and earnings.
If a person believes that they will be required to pay excessive NICs, they can apply to defer payment of some contributions. In this instance, the employer will be permitted to deduct primary Class 1 NICs at a rate of 3.25% from all earnings in excess of the primary threshold. Normal secondary contributions will be payable.
Conclusion
Understanding National Insurance Contributions (NICs) in the UK is crucial for both employees and employers. NICs are a mandatory tax used to fund various state benefits, and the amount an individual pays depends on their earnings. Employees need to understand the impact of NICs on their salary and the State Pension they will receive.
Employers need to ensure they are paying the correct amount of NICs for their employees to avoid penalties from HMRC. By understanding NICs, employees and employers can stay compliant with the law and contribute to the UK’s social welfare system.
