National Insurance – A Map through the maze

21 10 2009

All rates in this article are for 2009/10.

NIC for Employees

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

They are paid on earnings between £110 and £844 per week at 11% and then an extra 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.

NICs for Employers

Class 1 secondary contributions are paid by the employer at the rate of 12.8% on all the employee’s income above £110 per week (2009/10). 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 £2.40 per week and are due if you earn more than £5,075 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 £5,715 and £43,875 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 £12.05 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.

Future Increases

The Government have announced there will be a 0.5% increase in the rates of national insurance for employers’, employees’ and the self-employed class4 contributions from April 2011.

How We Can Help You

National Insurance can be a complex area and HM Revenue & Customs have wide powers. We can assist you with compliance and taking advantage of NIC planning opportunities, so email me at ben@keepers.info if you would like any help, or some advice.

Fore more advice on National Insurance, why not check out the Best Accountants in Sussex?Tax Accountant

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21 10 2009
National Insurance - A Map through the maze | LatNet.BIZ Internet Business News

[…] here to see the original: National Insurance – A Map through the maze ebusiness, […]

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