National Insurance

24 October 2003 by
National Insurance

National insurance contributions were traditionally contributions to a national insurance fund out of which various benefits were paid, most notably the state pension. Over time, however, they have effectively become little more than an additional tax on the employer and employee.

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A national insurance number marks a person's registration with the state social security scheme. It is also used as a reference number by the Inland Revenue. It is by this number that a person's contribution record is maintained. It ensures that contributions paid by an individual are put on the right record, so that whenever a claim for benefit is made, the correct amount can be paid.

What if they haven't got a national insurance number?

Anyone who is resident or present in Great Britain and over the age of 16 must have a national insurance number. A national insurance number is usually notified to a person during the year before his or her sixteenth birthday.

A person without a national insurance number can apply to his or her local social security office. Alternatively, an employer can apply for a number by completing form CA6855. Visit the here for the national insurance forms.

How does the system work?

Contributions are payable by anyone over the age of 16 who is either an employed earner or a self-employed earner. In the case of employed earners, contributions are also payable by the employer.

There is also a voluntary contribution payable by a person who, whether already belonging to one of the categories mentioned above or not, wishes to pay contributions in order to make up his or her entitlement to benefits. (Voluntary contributions may be paid, for example, by people who have worked abroad for a while and want to ensure they have paid enough to maintain the level of their pension on retirement).

There are different grades of contributions:

Class 1 contributions

  • payable by employees (primary contribution) + employers (secondary contribution)

Class 2 contributions

  • flat-rate contribution payable by self-employed earners

Class 3 contributions

  • voluntary contributions

Class 4 contributions

  • payable by self-employed earners based on the profits of their business

As a general rule, employers handle both income tax payments (through the Pay As You Earn scheme) and national insurance contributions whenever they make a payment of earnings to an employee.

There are special rules for directors, which are fairly complicated. Information on these rules is best obtained from a tax specialist or direct from the Inland Revenue.

How do I pay national insurance contributions (NICs)?

During the tax year you must:

  • deduct the correct amount of Pay As You Earn (PAYE) from your employees' pay
  • work out the level of NICs you and your employees have to pay
  • keep a record of your employees' pay, and PAYE and NICs due, on the sheets provided in your PAYE pack
  • make monthly (or quarterly) payments of the total PAYE and NICs due to the Inland Revenue. Payments must be made within 14 days of the end of each tax month or quarter.

At the end of the tax year you must:

  • send a return to the Inland Revenue office showing details of each employee's total pay, and the PAYE and NICs due (form P35)
  • send details to the Inland Revenue office about certain expenses you have paid to employees, or benefits you have provided them with, if appropriate.
  • give each employee who has paid PAYE and NICs and is still working for you at the end of the tax year a certificate showing their pay, PAYE and NIC details (form P60)
  • give your employees a copy of the information you have given the Inland Revenue office about their expenses payments and benefits provided (form P11D)

How do I work them out?

Payments can be calculated relatively easily by using the relevant tables provided as part of the PAYE scheme sent to you on each year when you register as an employer with the Inland Revenue. If you need further information or have a specific problem your should seek assistance from an accountant or direct from the Inland Revenue.

What constitutes gross pay?

The gross pay used to calculate NICs is known as earnings. Gross pay is the amount due to the employee before any deductions. It includes such things as salaries, wages, overtime, bonus payments and commission.

What's an earnings period?

The interval that the payment covers is called an earnings period. If you pay an employee weekly, the earnings period is one week. If you pay an employee monthly, the earnings period is one month.

How are Class 1 NICs made up?

Class 1 NICs are made up of two elements:

  • employee's contribution (primary contribution), which you are liable to pay in the first instance but which can be deducted from your employee's pay. This currently stands at nil up to £87 per week and 10% thereafter;
  • employer's contribution (secondary contribution), which you are liable to pay as an employer. This currently stands at 11.9%.

by Richard Garrod Richard Garrod is a specialist tax partner at accountants Wilson Braithwaite Scholey, based in their Leeds Office.

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