National insurance contributions (NICs) are essentially a tax on earned income. The NICs regime divides income into different classes: Class 1 contributions are payable on earnings from employment, while the profits of the self-employed are liable to Class 2 and 4 contributions.
National insurance is often overlooked yet it is the largest source of government revenue after income tax.
We highlight below the areas you need to consider and identify some of the potential problems. Please contact us for further specific advice.
Scope of NICs
Employees are liable to pay Class 1 NIC on their earnings. In addition a further secondary contribution is due from the employer.
For 2016/17 employee contributions are only due when earnings exceed a ‘primary threshold’ of £155 per week. The amount payable is 12% of the earnings above £155 up to earnings of £827 a week, the Upper Earnings Limit (UEL). In addition there is a further 2% charge on weekly earnings above the UEL. Secondary contributions are due from the employer of 13.8% of earnings above the ‘secondary threshold’ of £156 per week for 2016/17. There is no upper limit on the employer’s payments.
For 2017/18 the primary and secondary thresholds are aligned at £157 a week and the UEL is £866 per week.
Employer NIC for the under 21s
Employer NIC for those under the age of 21 are reduced from the normal rate of 13.8% to 0%. For the 0% rate to apply the employee will need to be under 21 when the earnings are paid.
This exemption will not apply to earnings above the Upper Secondary Threshold (UST) in a pay period. The UST is set at the same amount as the UEL, which is the amount at which employees’ NIC fall from 12% to 2%. The weekly UST is £827 a week and £43,000 per annum for 2016/17 (£866 per week and £45,000 per annum for 2017/18). Employers will be liable to 13.8% NIC beyond this limit. The employee will still be liable to pay employee NIC.
NIC for apprentices under 25
From 6 April 2016 employer NICs are 0% for apprentices under 25 who earn less than the upper secondary threshold (UST) which is £827 per week and £43,000 per annum (£866 and £45,000 per annum for 2017/18). Employers are liable to 13.8% NIC on pay above the UST. Employee NICs are payable as normal.
An apprentice needs to:
- be working towards a government recognised apprenticeship in the UK which follows a government approved framework/standard
- have a written agreement, giving the government recognised apprentice framework or standard, with a start and expected completion date.
Employers need to identify relevant apprentices and generally assign them NIC category letter H to ensure the correct NICs are collected.
Employers need to ensure they amend the contributions letter when the apprenticeship ends or the employee turns 25.
Benefits in kind
Employers providing benefits such as company cars for employees have a further NIC liability under Class 1A. Contributions are payable on the amount charged to income tax as a taxable benefit.
Most benefits are subject to employer’s NI. The current rate of Class 1A is the same as the employer’s secondary contribution rate of 13.8% for benefits provided.
NICs are due from the self-employed as follows:
- flat rate contribution (Class 2)
- variable amount based on the taxable profits of the business (Class 4).
From 6 April 2015 liability to pay Class 2 NIC arises at the end of each year, generally collected as part of the final self assessment payment.
The amount of Class 2 NIC due is calculated based on the number of weeks of self-employment in the year and calculated at a rate of £2.80 per week for 2016/17 (£2.85 for 2017/18).
Self employed individuals with profits below the Small Profits Threshold of £5,965 (increasing to £6,025 for 2017/18) are not liable to Class 2 NIC but have the option to pay Class 2 NIC voluntarily at the end of the year so that they may protect their benefit rights.
For 2016/17 Class 4 is payable at 9% on profits between £8,060 and £43,000. In addition there is a further 2% on profits above £42,385. The equivalent profit limits are £8,164 and £45,000 for 2017/18.
Abolition of Class 2 NICs
From 6 April 2018 Class 2 contributions will be abolished and Class 4 contributions reformed to include a new threshold (to be called the Small Profits Limit).
Access to contributory benefits for the self-employed is currently gained through Class 2 NICs. After abolition, those with profits between the Small Profits Limit and Lower Profits Limit will not be liable to pay Class 4 contributions but will be treated as if they have paid Class 4 contributions for the purposes of gaining access to contributory benefits. All those with profits at or above the Class 4 Small Profits Limit will gain access to the new State Pension, contributory Employment and Support Allowance and Bereavement Benefit.
Those with profits above the Lower Profits Limit will continue to pay Class 4 contributions.
Class 3 voluntary contributions
Flat rate voluntary contributions are payable under Class 3 of £14.10 per week for 2016/17 (£14.25 for 2017/18). They give an entitlement to basic retirement pension and may be paid by someone not liable for other contributions in order to maintain a full NICs record.
From 6 April 2018 Class 3 contributions, which can be paid voluntarily to protect entitlement to the State Pension and Bereavement Benefit, will be expanded to give access to the standard rate of Maternity Allowance and contributory Employment and Support Allowance for the self-employed.
Class 3A Voluntary National Insurance
A class of voluntary NIC (Class 3A) has been introduced that gives those who reach State Pension age before 6 April 2016 an opportunity to boost their Additional State Pension by topping it up by up to £25 per week.
Class 3A is designed to give pensioners an option to top up their pension in a way that will protect them from inflation and offer protection to surviving spouses. In particular, it may help women, and those who have been self-employed, who may have low Additional Pension entitlement. The top up will be available to those who reach State Pension Age before 6 April 2016 including those who have already started to draw their state pension.
The amount of the contribution varies depending on the age and sex of the individual. A useful calculator to determine the cost of contributions can be made www.gov.uk/state-pension-topup
Class 3A NIC can be made from 12 October 2015 to 5 April 2017.
National Insurance – Employment Allowance
The Employment Allowance is available to many employers and can be offset against their employer Class 1 NIC liability. The amount of the Employment Allowance was £2,000 for 2014/15 and 2015/16 which increased to £3,000 for 2016/17.
There are some exceptions for employer Class 1 liabilities including liabilities arising from:
- a person who is employed (wholly or partly) for purposes connected with the employer’s personal, family or household affairs
- the carrying out of functions either wholly or mainly of a public nature (unless charitable status applies), for example NHS services and General Practitioner services
- employer contributions deemed to arise under IR35 for personal service companies.
From April 2015 the availability of the allowance was extended to those employing care and support workers. Please contact us if this may be relevant to you as there are specific conditions which must be satisfied.
There are also rules to limit the employment allowance to a total of £2,000 (£3,000 for 2016/17) where there are ‘connected’ employers. For example, two companies are connected with each other if one company controls the other company.
The allowance is limited to the employer Class 1 NIC liability if that is less than the Employment Allowance (£2,000 for 2014/15 and 2015/16 and £3,000 for 2016/17).
The allowance is claimed as part of the normal payroll process. The employer’s payment of PAYE and NIC is reduced each month to the extent it includes an employer Class 1 NIC liability until the Employment Allowance limit has been reached.
Changes to the availability of the Employment Allowance
From April 2016, companies where the director is the sole employee will no longer be able to claim the Employment Allowance.
Time of payment of contributions
Class 1 contributions are payable at the same time as PAYE ie monthly. Class 1A contributions are not due until 19 July (22nd for cleared electronic payment) after the tax year in which the benefits were provided.
It is therefore important to distinguish between earnings and benefits.
Class 1 earnings will not always be the same as those for income tax. Earnings for NI purposes include:
- salaries and wages
- bonuses, commissions and fees
- holiday pay
- certain termination payments.
Problems may be encountered in relation to the treatment of:
- expense payments
Expense payments will generally be outside the scope of NI where they are specific payments in relation to identifiable business expenses. Round sum allowances give rise to a NI liability.
In general benefits are not liable to Class 1 NICs. There are however some important exceptions including:
- most vouchers
- stocks and shares
- other assets which can be readily converted into cash
- the payment of an employee’s liability by an employer.
Directors are employees and must pay Class 1 NICs. However directorships can give rise to specific NIC problems. For example:
- directors may have more than one directorship
- fees and bonuses are subject to NICs when they are voted or paid whichever is the earlier
- directors’ loan accounts where overdrawn can give rise to a NIC liability.
We can advise on the position in any specific circumstances.
Employed or self-employed
The NICs liability for an employee is higher than for a self-employed individual with profits of an equivalent amount. Hence there is an incentive to claim to be self-employed rather than employed.
Are you employed or self-employed? How can you tell? In practice it can be a complex area and there may be some situations where the answer is not clear.
In general terms the existence of the following factors would tend to suggest employment rather than self-employment:
- the ‘employer’ is obliged to offer work and the ‘employee’ is obliged to accept it
- a ‘master/servant’ relationship exists
- the job performed is an integral part of the business
- there is no financial risk for the ‘employee’.
It is important to seek professional advice at an early stage and in any case prior to obtaining a written ruling from HMRC.
If HMRC discover that someone has been wrongly treated as self-employed, they will re-categorise them as employed and are likely to seek to recover arrears of contributions from the employer.
HMRC carry out compliance visits in an attempt to identify and collect arrears of NICs. They may ask to see the records supporting any payments made.
HMRC have the power to collect any additional NICs that may be due for both current and prior years. Any arrears may be subject to interest and penalties.
Please contact us for advice on NICs compliance and ways to minimise the effect of a HMRC visit.
How we can help
Whether you are an employer or employee, employed or self-employed, awareness of NICs matters is vital.
HMRC have wide enforcement powers and anti-avoidance legislation available to them. Consequently it is important to ensure that professional advice is sought so that all compliance matters are properly dealt with.
We would be delighted to advise on any compliance matters relevant to your own circumstances so please contact us.