Basic guide to National Insurance Contributions

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·         National Insurance for the Self Employed, Employees and Employers.

Self Employed people pay 2 types of National Insurance – Class 2 and Class 4.

·         Class 2 National Insurance is a flat weekly amount (£2.70 for 2013/14) paid monthly or 6 monthly by direct debit.

·         It contributes towards your entitlement to your basic state pension as well as some other, but not all, benefits.

·         When you first become self employed it is important to make sure you register to make these contributions either by:

-          speaking to HMRC (newly Self Employed Helpline: 0300 200 3505)

-          by using the Revenue’s online registration tool or

-          by completing form CWF1 which you should be able to find easily on Google.

There are a few exemptions available for Class 2 NI the most common being age exemption and small earnings exemptions. If you think you may not need to pay Class 2 NI then you should speak to your accountant.

·         Class 4 National Insurance is calculated via your Self Assessment Tax return and is based on your assessable profits and payable along with any tax due for the year. The current rates are: 

-          7,755 @ 0%

-          7,756-41,450 @ 9%

-          above £41,450 @ 2%

·         Using these rates a person profiting £50,000 during 2013/14 would pay £3,203 of Class 4 National Insurance and this would be due on 31 January 2015 - the 31^st January following the end of the tax year - along with any tax they are due to pay.

Again there are some exemptions and you should speak to your accountant if you think you might not need to pay Class 4 National Insurance.

Employees normally pay only Class 1 primary contributions.

·         These are deducted by your employer based on your gross salary before they pay you your net salary.

·         The current rates are:

-          7,748 @ 0%

-          7,749-41,444 @ 12%

-          above 41,444 @ 2%

·         The deductions made for Class 1 primary contributions contribute towards your entitlement to your basic state pension and HMRC keep track of these using your National Insurance number.

·         There are some exemptions and also some situations where lower rates may be paid. You should speak to your accountant if you would like to learn more.

Employers pay Class 1 secondary contributions for their employees, Class 1A and sometimes Class 1B National Insurance.

Class 1 secondary contributions are charged as a percentage of employee’s earnings over certain amounts. The rates are not included in this guide, as this type of National Insurance applies differently depending on whether the employee is also a director of the company.

Class 1A National Insurance is due on the value of some taxable benefits provided to employees during a tax year. These benefits are reported on forms P11d(b) and P11d and any National Insurance due must be paid by 19^th July following the end of the tax year in which the benefit has been provided. The rules can be rather complex and there are heavy fines for completing these forms incorrectly, so it is a good idea to seek advice if you are providing your employees with benefits in kind.

Class 1B National Insurance is paid by an employer who enters into a PAYE settlement agreement with the Revenue. This is where an employer provides a taxable benefit to employees but does not want the employees to suffer the tax themselves. If you are thinking of entering into such an agreement I would highly advise you to speak to your accountant.

 There are many exemptions and planning opportunities when considering National Insurance contributions for both individuals and employers. This guide has been intended to be used to explain the very basics and you should seek advice if any of the situations (below) apply to you or if you do not understand your obligations.

·         Both employed and self employed

·         Reaching state pension age

·         Not sure if you qualify for state pension

·         Employer wanting to provide benefits to employees

·         Under 16 years old

·         Low earnings

·         Women who applied to pay reduced National Insurance

·         Employers thinking of entering into a PAYE Settlement Agreement

If you have any questions/require further advice on any of the above, please do not hesitate to contact Robyn Milstead – Personal Tax Manager at Ward Williams. robyn.milstead@wardwilliams.co.uk