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National Insurance Contributions
National Insurance Contributions (NICs) are payable by both employed and self employed people, unless they are under 16 or over pensionable age (although employers still need to pay NICs on amounts paid to pensioners).
There are four classes of National Insurance:
- Class 1: paid by employees and employers;
- Class 2: paid by the self employed;
- Class 3: voluntary contributions paid by those who have not paid enough NIC contributions in the past to qualify for certain benefits; and
- Class 4: paid by the self employed.
Class 1 contributions
There are 4 types of Class 1 National Insurance Contributions:- Class 1 primary contributions
- Class 1 secondary contributions
- Class 1A contributions
- Class 1B contributions.
- Class 1 primary contributions are paid by employees on their gross earnings.
- Class 1 secondary contributions are paid by employers on their employees' gross earnings.
- Class 1A contributions are payable by employers on their employees' benefits in kind, such as company cars or private medical insurance.
- Class 1B contributions are paid only by employees who have a PAYE Settlement Agreement with HM Revenue & Customs.
Class 1 NICs are calculated using three levels of earnings, the earnings threshold, the lower earnings limit and the upper earnings limit.
Class 1 national insurance contributions are payable for 2004/05 as follows (not contracted out rates):
| Payment Period | |||
| Weekly | Monthly | Yearly | |
| Employees | £ | £ | £ |
| Nil on first (earnings threshold) | 79 | 343 | 4,108 |
| (*) 0% on next (lower earnings limit) | 12 | 52 | 637 |
| 11% on next (upper earnings limit) | 519 | 2,249 | 26,975 |
| 1% over | 610 | 2,644 | 31,720 |
| Employers | |||
| Nil on first | 91 | 395 | 4,745 |
| 12.8% on balance | (no upper limit) | ||
(*) Earnings between the lower earnings limit and the earnings threshold protect an entitlement to basic state pension and other contributory benefits without incurring any actual national insurance liability. Details of such earnings must be kept on form P11 and reported at the end of the year on a form P14.
Class 2 and Class 4 contributions
Class 2 contributions are payable by most self employed people, unless they are excepted on the grounds of small profits. For 2004/05 the rate is £2.05 per week, payable if earnings exceed £4,215 per annum. Class 2 NIC is paid either by direct debit or on invoice:- If you pay by direct debit you will pay monthly, normally on the second Friday of the month. The amount of the monthly payment represents either four or five weeks' contributions, depending on the number of Sundays in the previous tax month.
- If you pay on invoice you will be sent a bill quarterly in January, April, July and October.
We recommend, for convenience, that you set up a direct debit.
Class 4 contributions are paid by self employed people. The amount payable is based on your profits. For 2004/05 there is no charge if your profits are less that £4,745. Profits of between £4,745 and £31,720 are charged at a rate of 8% and any excess profit above £31,720 is charged at 1%, without any upper limit.
Class 4 contributions are collected under the self assessment system, and so your contributions for 2004/05 will be collected with your tax as follows:
- on 31 January 2005, first payment on account (normally 50% of 2003/04 liability)
- on 31 July 2005, second payment on account (normally 50% of 2003/04 liability)
- on 31 January 2006, balancing payment.
Are you paying too much NIC?
If you have income from more than one job, or if you have self employment income as well as being employed, then you may be paying more National Insurance contributions than you need to.There is a prescribed annual maximum of National Insurance contributions, and you should not be paying more than this. If you only have one source of income, the basic National Insurance calculations should ensure that you do not pay more than this limit. Problems may arise, however, where you have more than one source of income, for example two employments or an employment and a self employment.
If you think there is a chance of exceeding the limit, you can apply for deferment of some of the contributions. After the end of the tax year, your overall contribution position for the year will be worked out and any balance of contributions will need to be paid over.
Deferment applications should be made before the start of the tax year, but applications may be accepted up to 14 February during the tax year.
If you do not apply for deferment in time, it is still possible to claim a refund of overpaid National Insurance contributions so long as you make the claim within 5 years and 10 months after the end of the tax year in which the payment was made.
If you think you may be paying too much NIC, ask us about making a deferment application and reclaiming any amounts overpaid.
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