National insurance (Rates provided relate to 2015-16) – March 2016
There are various categories of national insurance which are as follows:
Class 2 – this is paid at a rate of £2.80 per week on self-employed earnings in excess of £5,965 pa. It used to be payable monthly/half yearly, but is now payable on submission of your tax return for the year. This negates the need to claim small earnings exception for profits below the threshold. Payment of class 2 NIC counts towards the basic state pension, new state pension, employment and support allowance, maternity allowance and bereavement benefits. See below re recent budget.
Class 4 – this is paid like an additional tax. It is paid with your income tax each year. It is 9% on profits between £8,060 and £42,385 and 2% on profits in excess of £42,385. There are no entitlements that result from the payment of class 4.
Class 1 – this is payable by both employees and employers. For employees (primary contributions) it is 12% on earnings between £155 and £815 per week and 2% on earnings in excess of £815 per week. There is a reduced rate of national insurance for married women – who elected for the reduced rate before April 1977 – the rate of 12% above is reduced to 5.85%. For employers (secondary contributions) 13.8% is paid on earnings in excess of £156 per week. The weekly amounts are adjusted accordingly for monthly paid, or annually for directors, who have an annual basis period. There are rebates in relation to the above amounts where the employee has opted to contract out. Class 1 A is payable at 13.8% on benefits in kind and class 1 B is payable at 13.8% by employers who enter into a PAYE settlement agreement with HMRC. From 6 April 2015 employers class 1 NIC is not required on earning less than £815 per week for those under 21. This is under 25 from 6 April 2016.
Note there is currently an allowance of £2,000 (moving to £3,000 for 2016-17) for employers class 1 NIC – up to which no employers NIC is payable.
Class 1 contributions counts towards the basic state pension, additional state pension, new state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits
If no contributions are due you can volunteer to pay class 3 – at the rate of £14.10 per week. This entitles you to increase your pension entitlement. From 12 October 2015 class 3 A was introduced for those that retired before 6 April 2016, to enable them to top up their additional state pension. Payment of class 3 NIC counts towards the basic state pension, new state pension and bereavement benefits.
Where someone has several employments or employment and self-employment there is a maximum amount of national insurance that can be paid. You need to advise HMRC accordingly so that NIC is not over paid.
You stop paying employees NIC when you reach pension age or the 6 April after you 65th birthday for class 4 NIC. Note employers NI is still due for employees once they reach retirement age.
In the budget this week, it was announced that class 2 NIC would be abolished from April 2018. It is unclear at this stage whether there will be any adjustments to class 4 NIC to compensate for this.
Friston Wicks; Chartered Accountant and Chartered Tax Adviser