Chapter 8 - National insurance contributions

Question 1

Who pays national insurance contributions?

Answer 1

National insurance contributions (NICs) are paid by self-employed individuals, employees and their employers.

Question 2

What are NICs used for?

Answer 2

National insurance contributions (NICs) are used to fund state benefits such as jobseeker’s allowance and state pensions.

Question 3

What are the four classes of NICs?

Answer 3

Class 1 Paid by employees and their employers

Class 1A Paid by employers

Class 2 Paid by self-employed individuals

Class 4 Paid by self-employed individuals

Question 4

What are the instructions regarding rounding when calculating NICs in the examinations?

Answer 4

Note that when calculating NICs in the examination you should round mathematically at each step of your computation.

Question 5

Who administers NICs?

Answer 5

National insurance contributions are administered by the National Insurance Contributions Office (NICO) which is part of HMRC.

Question 6

How are Class 1 contributions collected?

Answer 6

You have already seen that Class 1 contributions are collected under the PAYE system on a monthly basis.

Question 7

When are Class 1A contributions payable?

Answer 7

Class 1A contributions are payable by 19 July (22 July if paid electronically) following the end of the tax year to which they relate.

Question 8

Where do Class 2 contributions come from?

Answer 8

Class 2 contributions come within the self-assessment system`

Question 9

How are Class 4 contributions collected?

Answer 9

Class 4 contributions are collected together with income tax under the self-assessment system.

Question 10

Who pays Class 1 primary contributions?

Answer 10

Class 1 primary contributions are paid by employees.

Question 11

Who pays Class 1 secondary contributions?

Answer 11

Class 1 secondary contributions are paid by employers.

Question 12

How is the amount of Class 1 NICs payable determined?

Answer 12

The amount of Class 1 NICs payable depends on the age of the employee and the level of the employee’s earnings in the ‘earnings period’.

Question 13

Who are liable to pay Class 1 primary NICs?

Answer 13

All employees aged between 16 and state pension age are liable to pay Class 1 primary NICs.

Question 14

What is the state pension age?

Answer 14

For the purposes of your exam, you should assume that any taxpayer aged 65 or over has reached state pension age.

Question 15

What constitutes an employee’s earnings?

Answer 15

An employee’s earnings for Class 1 NIC purposes include all earnings received in monetary form: salary, commission, bonus plus vouchers exchangeable for cash, goods or services.

Earnings do not usually include any taxable benefits.

Question 16

What is the earnings period?

Answer 16

Most employees are paid at regular intervals (weekly or monthly). This period is the earnings period.

Question 17

What is the primary threshold (PT)?

Answer 17

£166 per week, £719 per month or £8,632

per year

Question 18

For employees who earn less than the PT, what is the primary contributions payable?

Answer 18

Nil

Question 19

What is the upper earnings limit (UEL)?

Answer 19

£962 per week, £4,167 per month or £50,000

per year

Question 20

For employees who earn between the PT and upper earnings limit (UEL), what is the primary contributions payable?

Answer 20

Earnings less PT x 12%

Question 21

For employees who earn in excess of upper earnings limit (UEL), what is the primary contributions payable?

Answer 21

UEL less PT x 12%
plus
Earnings less UEL x 2%

Question 22

When is it acceptable to use annualised PT and UEL during the exam?

Answer 22

In the examination, you might be asked to work out the annual NICs payable by an employee. In this case, it is acceptable to use the annualised limits of £8,632 (PT) and £50,000 (UEL) if the employee is paid evenly throughout the tax year.

If the employee receives an additional payment such as a bonus in one earnings period, it will be necessary to calculate the NICs in relation to weekly or monthly earnings periods instead.

Question 23

What is the secondary threshold for employees aged 21 or over?

Answer 23

£166 per week, £719 per month or £8,632

per year

Question 24

What is the upper secondary threshold (UST) for employees aged under 21 years old?

Answer 24

£962 per week, £4,167 per month or £50,000

per year

Question 25

What is the apprentice upper secondary threshold (AUST) employees classed as apprentices and aged under 25 years old

Answer 25

£962 per week, £4,167 per month or £50,000 per year

Question 26

What are the secondary Class 1 NICs for 2019/20 for employees aged 21 or over?

Answer 26

Not above secondary threshold (ST) - Nil Above ST - Earnings less ST x 13.8%

Question 27

What are the secondary Class 1 NICs for 2019/20 for employees aged under 21 years old?

Answer 27

Not above upper secondary threshold (UST) - Nil Above UST - Earnings less UST x 13.8%

Question 28

What are the secondary Class 1 NICs for 2019/20 for employees classed as apprentices and aged under 25 years old?

Answer 28

Not above apprentice upper secondary threshold (AUST) - Nil Above AUST - Earnings less AUST x 13.8%

Question 29

What is the employer's allowance?

Answer 29

The total secondary Class 1 NICs of most employers is reduced by £3,000 per year (2019/20).

Question 30

What happens if the employer's total secondary Class 1 | NIC liability for all employees is less than £3,000 for 2019/20?

Answer 30

If the employer's total secondary Class 1 NIC liability for all employees is less than £3,000 for 2019/20, the employer pays no secondary Class 1 NIC for the year.

Question 31

Which employers are not eligible for the employer's allowance?

Answer 31

The employment allowance is not available to companies with a single director and no other employees.

Question 32

Who pays Class 1A contributions?

Answer 32

Class 1A contributions are payable by employers on taxable benefits provided to employees.

Question 33

What is the rate at which Class 1A contributions are payable?

Answer 33

13.8%

Question 34

What is the value of taxable benefits regarding Class 1A contributions?

Answer 34

The value of the taxable benefits for NICs is generally the same as the taxable value for income tax. However, any benefits taxed as earnings under Class 1 are not also subject to Class 1A charge.

Question 35

Who are liable to Class 2 and Class 4 contributions?

Answer 35

Self-employed taxpayers are liable to both Class 2 and Class 4 NICs.

Question 36

Which contribution among Class 2 and Class 4 contribute to an individual's contribution record?

Answer 36

Class 2 payments count towards an individual's | contributions record, while Class 4 payments do not.

Question 37

What is the weekly amount of Class 2 contributions?

Answer 37

A self-employed individual aged between 16 and state pension age is required to pay Class 2 contributions (equivalent of £3.00 per week of self-employment for 2019/20).

Question 38

What is the amount of Class 2 contributions payable by self-employed individuals earning below the small profits threshold?

Answer 38

No Class 2 contributions are required if the individual's profits are below the small profits threshold (£6,365 for 2019/20).

Question 39

Can taxpayers with profits below the threshold pay Class 2 contributions voluntarily?

Answer 39

Taxpayers with profits below the threshold are not liable for Class 2 NICs but are given the option to pay these voluntarily to protect their entitlement to contributory benefits.

Question 40

What are the Class 4 contributions payable?

Answer 40

Not above lower profits limit (£8,632) - Nil Between lower profits limit and upper profits limit (£50,000) - Earnings less lower profits limit x 9% In excess of upper profits limit - Upper profits limit less lower profits limit x 9% plus Earnings less upper profits limit x 2%

Question 41

When should self-employed people register to pay self-employed NICs?

Answer 41

To avoid penalties, registration must be made in time for a return to be issued for completion, submission and payment of any liability due by 31 January following the tax year during which self employment commenced.