The current system of National Insurance Contributions (NIC’s) has its roots in the National Insurance Act of1911 and was originally conceived as form of social security inasmuch as payment of NIC’s establishes an entitlement to certain state benefits (e.g. the State Pension and Sick Pay) for workers and their families
Everyone above the age of 16 and below the State Retirement age who is in work, whether employed or self-employed is therefore required to pay NIC’s. In addition, employers too have to pay NIC’s for everyone they employ.
NIC’s fall into a number of different classes depending upon who is paying them and for what purposes.
People who are unable to work maybe able to claim NI credits. These are equivalent to Class 1 NICs, though are not paid for. They are granted either to maintain a contribution record whilenot working, or to those applying for benefits whose contribution record is only slightly short of the requirements for those benefits.
Special Classes of National Insurance Contributions
In addition to the main classes of NIC’s mentioned above, employers also have to make additional contributions in certain circumstances
Class 1A Contributions - Class 1A contributions are paid by employers on the value of company cars and certain other benefits in kind provided to their employees and directors, at the standard employer contribution percentage rate for the tax year. Class 1A contributions do not provide any benefit entitlement for individuals.
Class 1B Contributions - Class 1B contributions are payable by employers as part of a PAYE Settlement Agreement (an arrangement whereby the employer meets the tax liabilities on certain benefits). Class 1B contributions are paid at the same rate as Class 1A contributions and do not provide any benefit entitlement for individuals.
National Insurance Contribution Rates
Employee Class 1 NIC’s
Employees pay Class 1 NIC’s on all of their earning above the Primary Threshold (PT) whichi s currently set to £1,048 per month. However, the rate doesn’t stay the same and reduces once earnings pass the Upper Earnings Limit (UEL) of £4,189 per month. Thus..
· A rate of nil is paid on earnings upto the PT
· A rate of 12% is payable on earnings between the PT and the UEL
· A rate of 2% is payable on earnings above the UEL
Employer Class 1 NIC’s
Employers pay Class 1 NIC’s on all earnings above the Secondary Threshold (ST) which is currently set to £758 per month. There is no UEL for employer contributions.Thus ..
· A rate of nil is paid on earnings upto the ST
· A rate of 13.8% is paid on earnings above the ST
The diagram below shows the NIC's payable on a monthly salary payment of £5,000 based on current rates and thresholds.
The rate of Class 1A and 1B NIC’s (which only employers pay) is currently 14.53%
Class 2 NIC’s
Class 2 NIC’s are payable by the self-employed once their profits exceed the Small Profits Threshold (SPT) which is currently set at £6,725 per annum. These are charged at a rate of £3.15 per week.
Some individuals however may choose to voluntarily pay Class 2 NIC’s even if their profits are below the SPT to ensure they retain their entitlement to certain state benefits (especially maternity allowance and contributions based employment and support allowances).
Class 4 NIC’s
The charging structure for Class 4 NIC’s paid by the self-employed is a little like Class 1 NIC’s inasmuch as there is a Lower Profits Limit (LPL) below which no contributions are charged and an Upper Profits Limit (UPL) beyond which a lower contribution rate is charged. The LPL currently sits at £11,908 per annum whilst the UPL is set to £50,270 per annum. Thus …
· A rate of nil is paid on profits below the LPL
· A rate of 9.73% is paid on profits between the LPL and the UPL
· A rate of 2.73% is paid on profits above the UPL
The diagram below illustrates the Class 4 NIC's payable on annual sole trade profits of £60k using current rates and thresholds
Going forward from tax year 2023/24, the LPL is going to be aligned to the personal income tax allowance
Class 3 Voluntary NIC’s
Class 3 voluntary contributions are usually paid at the original tax rates for the last two tax years and the current rate for all other years where contributions have been missed. The rates currently are
· 2022/23 - £15.85 per week
· 2021/22 - £15.40 per week
· 2020/22 - £15.30 per week
· 2019/20 - £15.00 per week
NIC’s for those with more than one job
As well as paying tax on a second job, individuals might have to pay some NIC’s on their second income as well. However National Insurance operates in a different way from income tax. With tax there is a single tax-free amount available per person per tax year. For National Insurance there is a separate PT for each job so long as it is with a different employer. Therefore an individual can have two jobs and provided both pay less than the PT, no NIC’s are payable even if the total earnings from the two jobs are more than the PT.
NIC’s for people who are both employed and self employed
Where someone is both employed and self-employed they will need to pay:
· Class 1NIC’s on their employed income; and
· Class 2 andClass 4 NIC’s on their self-employed income.
Class 1 NIC’s will be payable each pay day period, but Class 2 NIC’s are not collected until 31 January after the end of the tax year when a self-assessment return will normally be filed. Class 4 NIC’s are paid together with any income tax liabilities, payments on account and balancing payments.
NIC’s for those working after reaching the State Pension Age?
Individuals normally pay Class 1 NIC’s if they are an employee, from age 16 until they reach the state pension age.
Individuals who continue to work as an employee after they have reached state pension age do not currently have to pay Class 1 NIC’s (although there is an active debate around whether they should)
National Insurance Numbers
National Insurance numbers are used by HMRC to ensure each individual's tax and NIC's are recorded against them and them only. An NI number is made up of letters and numbers and never changes. Everyone is usually allocated an NI number once they reach the age of 16. However, for those who don't have one (say because they have arrived from abroad), it is possible to apply for a NI number by following the link below.
https://www.gov.uk/apply-national-insurance-number
