National Insurance
National Insurance classes
Check out the current tax and NI rates by clicking the link in 'Related pages'
Class 1
Paid as a percentage based on bandwidths by employees and employers on current period earnings
Class 1A
Paid as a percentage by employers on benefits provided to employees
Class 2
Flat rate paid by the self-employed
Class 3
A voluntary flat rate usually paid to maintain an NI record for retirement benefits etc
Class 4
Paid as a percentage by the self-employed on taxable profits of a business.
Although each class of NI has a particular roll to play it would be fair to say that NI is a tax on earnings just as income tax is. It came about, originally, as part of the National Health Service regulations in 1947 and was intended as the funding behind the service and other benefits. Nowadays it is just another income for the treasury, running a close second to income tax.
Employed or Self-employed
As there are financial advantages on the NI side to being self-employed workers can't arbitrarily declare themselves as 'self-employed'. At the end of the day the Inland Revenue make the decision and once made it is very hard to alter.
The Inland Revenue would prefer everybody to be employed, so they ask employment type questions, however the are also self-employment type questions. Also be aware of 'IR35' implications. You can get more information on IR35 by clicking the link in 'Related pages'
If you are paid by time periods for set hours and receive instructions as to how you work and this work is carried out on the clients premises and you are not allowed to appoint anyone else to do it for you then you will, in general, be classed as employed.
However, on the other hand if you provide your own equipment and have the ability to hire workers to do the work, make a financial loss as a result of a mistake you made and risk your own money in the business, are you paid by the job then you would, in general, be classed as self employed.
As the rates and thresholds are liable to change each year we have a separate page for them and is available from the 'NI rates' link in related pages to the left.
Class 1
This class is part of the PAYE system and is paid by both the employee and employer on wages paid to employees. There are different rates and thresholds that apply to the employee and employer.
Employee. Earnings between the Earnings Threshold and the Upper Limit are liable to a deduction at a flat rate of 11%. Earnings over the upper limit, no matter how much, are taxed at 1%. Although NI is not deducted on earnings between the Lower Earnings Limit and the earnings Threshold the entitlement to retirement and other benefits is retained.
Employer. All earnings over the Earnings Threshold are liable to a contribution of 12.8%. There is no upper limit.
An employer must be aware that the definition of earnings for tax and national insurance is not the same e.g. termination or redundancy payments. Items that would, at first sight, be classed as a benefit, but because they can readily converted in to cash are classed as earnings for PAYE, such as vouchers and stocks and shares.
Where the average earnings over a year of an employee fall below the Lower Earnings Limit some pension entitlement for the year will be lost. An employee can elect to make voluntary contributions of a fixed amount per period to ensure full entitlement for the year.
Class 1a
Relates entirely to most benefits in kind given by the employer to the employee. Over the years the treasury have reduced the number of benefits that are excluded from Class 1a. Only the employer pays this class of NI. The cash equivalent is worked out for each benefit, as prescribed by the Inland Revenue, and a flat rate percentage is charged.
Class 2
Only paid by self-employed people. Usually paid by direct debit and is due from all except those that have a total income of less than the Small Earnings Exception Limit. It is a flat rate payment and is usually increased each year. This is one of two classes due from the self-employed, see class 4.
Class 3
This is a flat rate voluntary contribution and gives an entitlement to basic retirement pension and is usually paid by a person who is not liable for any other contributions.
Class 4
This is the second section of a self-employed person liability. Where as class 2 is a flat rate and due whatever, this class is based upon the businesses taxable profits and is charged as a percentage on the profits that exceed the Lower Profits Limit. When the profits exceed the Upper Profits Limit a reduced percentage is charged for NI, giving roughly the same considerations as are given to employed people.
Compliance and enforcement
The amount of the NI deductions has to be listed separately on P14, 60 and 35 end of year forms and the amount due to the Inland Revenue has to accurately reflect the amount of NIC that has been collected and funding, recovery or rebate received. A complete set of records supporting the NI deductions etc has to be kept for at least three years after the tax year end.
The Inland Revenue regularly check 250,000, rising to 750,000 over the next few years, business's each year to make sure that all workers are correctly categorised and that NI is being correctly collected. They have the power to demand previous years records and to issue demands for incorrect collections plus interest and penalties.
To ensure minimal disruption in the event of an NI check visit by the Inland Revenue why not give us a call now and put your worries behind you.
