National Insurance Contributions

Published: 01 Sep 2013

 

Written by Ray Coman

 

All UK taxpayers are liable to national insurance between the age of 16 and state pension age.  A person outside of these age limits is not liable to national insurance on their income.

 

National Insurance Contributions on Employment

 

Thresholds for Class 1 National Insurance Contributions (NICs)

 

  2016-17 2015-16
Thresholds Annual Monthly Weekly Annual Monthly Weekly
Lower earnings limit  £5,824 £485 £112  £5,824 £485 £112
Primary earnings threshold  £8,060 £671  £155  £8,060 £671 £155
Secondary earnings threshold £8,112  £676  £156  £8,112 £676 £156
Upper accruals point N/a N/a N/a £40,040 £3,337 £770
Upper earnings limit £43,000 £3,583 £827 £42,380 £3,531 £815

 

Class 1 NICs are payable on employment earnings.

 

The lower earnings limit is the amount of earnings up to which a person will not accrue any social security benefits.

 

A taxpayer requires a number of qualifying years (35 years from 2016/17) to secure entitlement to the basic state pension.  A year of earnings above the lower earnings limit will add a year towards the minimum number required to secure a basic state pension.

 

Where an employer does not pay any employee or director above the lower earnings' limit, there may not be a requirement to register as an employer with HMRC.

 

The primary limit is the threshold at which an employee become liable to NICs and the secondary threshold is the limit at which the employer becomes liable to pay NICs.

 

From 2016/17 it is no longer possible to accrue an additional state pension based on making more national insurance contributions.  Consequently, there is no longer an upper accruals point.

 

The employment allowance exempts employers' national insurance liability below a threshold.  This allowance limit is £3,000 from April 2016.  However, the only director of a company is no longer entitled to the employment allowance.

 

Class 1 NIC rate on earnings

 

  2016-17 2015-16
  Employee Employer Employee Employer
Between primary threshold and upper earnings limit 12% 13.8% 12% 13.8%
Above upper earnings limit 2% 13.8% 2% 13.8%
Contracted out rebate N/a N/a 1.4% 3.4%

 

Prior to 2016/17 it was possible for an employee to contract out of the additional state pension, and pay into an approved private pension instead.  However, contracting out is no longer possible from 2016/17, since the additional state pension has been discontinued.

 

Class 1(A) NICs

 

  2016-17 2015-16
Rate 13.8% 13.8%

 

National insurance is payable by employers on most taxable benefits. There is no lower limit. Taxable benefits are not generally subject to employee's national insurance contributions, although certain readily convertible assets, such as listed shares, are subject to employee's national insurance contributions.

 

National insurance on Self-employment

Class 2 NICs

 

  2016-17 2015-16
  Weekly Yearly Weekly Yearly
Flat rate £2.80 £145.60 £2.80 £145.60
Small earnings exception limit   £5,965   £5,965

 

Class 2 national insurance is payable by sole traders and partners in a partnership. If profits are below the small profits limit then it is possible to be excepted from liability to Class 2 NICs. The accrual of social security will be affected if no class 2 liability is paid for a particular year.

 

In the 2016 budget, the chancellor announced that Class 2 will be abolished from April 2018.

 

Class 4 NICs

 

  2015-17 2015-16
  Profit band Rate Profit band Rate
Between lower profits and upper profits limit £8,060 to £43,000 9% £8,060 to £42,385 9%
Above upper profits limit   2%   2%

 

Self-employed individuals are liable to class 4 national insurance contributions in addition to class 2 NICs and income tax. Class 4 national insurance contributions will not count towards state benefits, until Class 2 NICs are abolished.

 

Class 3 NICs

 

  2016-17 2015-16
  Weekly Yearly Weekly Yearly
Flat rate £14.10 £733.20 £14.10 £733.20

 

A person can top up national insurance by making voluntary contributions.  This would be suitable for a non-resident who does not have sufficient qualifying years towards a state pension.

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