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National Insurance - Your Way Round the Maze

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All rates in this article are for 2008/09

NIC for Employees

For employees Class1 National Insurance (NI) primary contributions are deducted from their salary each month as part of the PAYE system.

It is normally paid on earnings between £105 and £770 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 or S2P as it is now called (the State Second Pension Scheme) in which case a reduced rate is payable. If the employee 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 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 1 secondary contributions are paid by the employer at the rate of 12.8% on all the employee's income above £105 per week. The contributions must be paid over to HMRC together with the primary contributions deducted from the employees’ salaries, each by the 19th of each month or by 22nd if paying electronically. Employers with small payrolls can elect to pay quarterly.

Class 1A contributions are paid by the employer on most forms of benefits provided to the employee, at the rate of 12.8% on the value of the benefit provided. Class 1A contributions are paid once a year by 6 July after the tax year end.

Self Employment NIC

When you become self-employed there are two types of national insurance that are payable...

1. Class 2 contributions, amount to £2.30 per week and are due if you earn more than £4,825 per year. These 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.

2. Class 4 contributions on the taxable profit you make between £5,435 and £40,040 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 £8.10 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.

Class 2 contributions can also be paid voluntarily to protect entitlement to UK benefits while temporarily posted abroad.

Summary

  • Class 1 primary contributions are paid by employees;
  • Class 1 secondary contributions are paid by employers
  • Class 1A is paid by employers;
  • Class 2 is paid by the self-employed, and voluntarily by employees posted overseas;
  • Class 3 is a voluntary contribution to make up any deficits;
  • Class 4 is paid by the self-employed if they earn enough, but does not provide any entitlement to state benefits.

About the Author

Jonathan Amponsah BSc FCCA is a UK Tax Expert and the founding partner of A M P Associates – A specialist firm of chartered certified accountants and tax advisers based in London and Surrey. Jonathan advises on a wide range of business and tax issues and he is recognized for his proactive and innovative approach to taxation.

Jonathan can be contacted on 0845 009 8845 or email:jonathan@ampassociates.co.uk


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Article Published/Sorted/Amended on Scopulus 2008-04-26 23:41:50 in Tax Articles

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