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 and Class 3 are voluntary.
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.
Scope of NICs
Employees are liable to pay Class 1 NICs on their earnings. In addition, a further secondary contribution is due from the employer. For 2022/23 (valid from 6th April, 2022) employee contributions are only due when earnings exceed a 'primary threshold' of £190 per week. The amount payable is 13.25% of the earnings above £190 up to earnings of £967 a week, the Upper Earnings Limit (UEL). In addition, there is a further 3.25% charge on weekly earnings above the UEL. Secondary contributions are due from the employer of 15.05% of earnings above the 'secondary threshold' of £175 per week. There is no upper limit on the employer's payments.
Employer NICs for the under 21s
The rate of employer NICs for those under the age of 21 is 0%. For the 0% rate to apply the employee will need to be under 21 when the earnings are paid not when earned.
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.
NICs for apprentices under 25
Employer NICs are also reduced to 0% for apprentices under 25 who earn less than the UST which is £967 per week and £50,270 per annum. Employers are liable to 15.05% NICs 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 NICs 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 NICs 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 NICs. The current rate of Class 1A is the same as the employer's secondary contribution rate of 15.05% 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).
The liability to pay Class 2 NICs arises at the end of each year and is generally collected as part of the final self-assessment payment.
The amount of Class 2 NICs due is calculated based on the number of weeks of self-employment in the year and calculated at a rate of £3.05 per week for 2022/23).
Self-employed individuals with profits below the Small Profits Threshold of £6,515 for 2022/23 are not liable to Class 2 NICs but have the option to pay Class 2 NICs voluntarily at the end of the year so that they may protect their benefit rights.
For 2022/23 Class 4 is payable at 9% on profits between £9,569 and £50,270. In addition, there is a further 2% on profits above £50,270.
Class 3 voluntary contributions
Flat rate voluntary contributions are payable under Class 3 of £15.40 per week for 2022/23. 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 6th April 2018 Class 3 contributions, which can be paid voluntarily to protect entitlement to the State Pension and Bereavement Benefit, has been expanded to give access to the standard rate of Maternity Allowance and contributory Employment and Support Allowance for the self-employed.
National Insurance - Employment Allowance
The Employment Allowance is available to many employers and can be offset against their employer Class 1 NICs liability. The amount of the Employment Allowance is currently £4,000. Companies, where the director is the sole employee earning above the secondary threshold, are no longer able to claim the Employment Allowance.
There are other 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. However, the allowance may be available for those employing care and support workers.
- 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.
The allowance is limited to the employer Class 1 NICs liability if that is less than the Employment Allowance.
The allowance is claimed as part of the normal payroll process. The employer's payment of PAYE and NICs is reduced each month to the extent it includes an employer Class 1 NICs liability until the Employment Allowance limit has been reached.
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. However, NI is payable on round sum allowances.
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 NICs 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 NICs liability.
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 discovers 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.
These payments are to ensure there are no gaps in your National Insurance record. Gaps may mean that you will not have enough years of NI contributions to get the full State Pension and qualify for some benefits. Gaps could be caused by:
- low earnings when employed
- unemployed and not claiming benefits
- small profits when self-employed so did not pay NI
- living or working outside of the UK
Therefore, paying voluntary contributions could fill these gaps. You can check your national Insurance record by clicking here.
Some employers offer a salary sacrifice scheme where you will forgo some salary to reduce tax and/ or NI for such things as:
- increasing pension contributions
- retraining courses
- buying more annual leave
This allows your money to be spent on things that benefit you whilst reducing your tax and/ or NI contributions.
NI increases from 6th April, 2023 by 1.25% to be spent on the NHS, health and social care. The increase applies to:
- Class 1
- Class 4
- Secondary Class 1, 1A and 1B
The only exclusion to the increase will be that people over the State Pension age will not need to pay this.