National insurance (Rates provided relate to 2019/2020)
There are various categories of national insurance which are as follows:
Class 2 – this is paid at a rate of £3 per week on self-employed earnings in excess of £6,365 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.
Class 4 – this is paid like an additional tax. It is paid with your income tax each year. It is 9% on profits between £8,632 and £42,385 and 2% on profits in excess of £50,000. 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 £166 and £962 per week and 2% on earnings in excess of £962 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 £166 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.
Employers class 1 NIC is not required on earning less than £962 per week for those employees under 21 and apprentices under 25.
Note there is currently an allowance of £3,000 for employers class 1 NIC – up to which no employers NIC is payable. This allowance is not available to companies where the sole employee is a director.
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.
National Insurance credits for looking after a child up to 12 years of age
If you look after your child (under 12) then you are entitled to national insurance tax credits. By claiming child benefit you should automatically get the credits. If your partner earns more than £60,000 pa all of the benefit would have to paid back, or not claimed. Between £50,000 pa and £60,000 pa the relief is tapered. However you need to register but not claim to get the credit.
If you are working and paying class 1 NI you should be maintaining your state pension.
If you are unsure of your entitlement to a full state pension set up a personal tax account with HMRC at https://www.gov.uk/personal-tax-account and look at the details of contributions made and entitlement.
If no contributions are due you can volunteer to pay class 3 – at the rate of £15.00 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.
Future of Class2 NI
In the 2016 budget this week, it was announced that class 2 NIC would be abolished from April 2018. Class 2 has not been abolished. If it is in the future adjustments will need to be made to class 4 NIC to compensate for this.
Friston Wicks; Chartered Accountant and Chartered Tax Advisor