NATIONAL INSURANCE AND SOCIAL SECURITY

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NATIONAL INSURANCE AND SOCIAL SECURITY
Theory and Practice of Taxation C Year
2006-07 Lec 8
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National Insurance Contributions

• IntroductionContributions made by those in work
  for entitlement to certain state benefits
  (contributory benefits) incapacity
  benefit jobseekers allowance maternity
  allowance widows pension retirement pension
• NICs are paid by employers, employees and the
  self employed

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National Insurance Contributions

• Introduction (cont)NICs help to finance the
  contributory benefits and make a small
  contribution towards the national health service
  (which is not itself a contributory benefit)
• The National insurance contributions are dealt
  with by the Revenue National Insurance
  Contributions Office (NICO)
• Social security benefits are dealt with by
  Jobcentre Plus

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National Insurance Contributions

• Introduction (cont)Collection of contributions
  made by Inland RevenueNICs are based on
  earnings of those aged 16 to retirement ageThe
  amount of contribution is dependent on the
  employment status of the individual and the level
  of earnings

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National Insurance Contributions

• There are four classes of NI contributionsClass
  1 Paid by employees (primary (class 1)
  contributions)and
• Employers (secondary (class 1A and 1B)
  contributions).. Class 2 Paid by self employed
  individuals
• Class 3 Voluntary contributions paid by
  individuals
• Class 4 Also paid by self-employed individuals

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National Insurance Contributions

• Class 1 Paid by employees (primary (class 1)
  contributions)and
• Employers (secondary (class 1A and 1B)
  contributions).. NICs are not deductible from
  gross salary for Income Tax purposes
• Employers contributions are deductible expenses
  from Trading Income (Schedule D Case 1)

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National Insurance Contributions

• Class 1 contributions ctd - rates of contribution
  (from 6th April 2006 to 5 April 2007).A
  liability arises whenever an employee earns more
  than the primary threshold (which is set at the
  weekly/monthly equivalent of the personal
  allowance) in any earnings period. There is
  an upper earnings limit above which the
  employees contributions but not the employers
  contributions are reduced.

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National Insurance Contributions and Social
Security

• Class 1 The current (2006-07) earnings limits
  are Weekly Monthly AnnualPrimary
  threshold 97 420 5,035Upper
  limit 645 2,795 33,540
• NB there is a further Lower Earnings Limit of
  4,524. Where an employees earnings fall between
  this and 5,035, he/she will be credited withnil
  rate contributions, creating an entitlement to
  certain state benefits

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National Insurance Contributions

• Class 1 contributions ctd - rates of contribution
  (from 6th April 2006 to 5 April 2007) ctd.
  Employee contributions (primary class 1
  contributions)No liability on earnings up to
  97 per week.Earnings of 97 to 645 per week
  11 Earnings above 645 1

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National Insurance Contributions

• Employer contributions
  (secondary class 1 contributions)No
  liability on earnings up to 97 per week12.8
  on earnings over 97 per week.
• Reduced rates apply where the employee is
  contracted out of SERPS

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National Insurance Contributions

• EARNINGS
• Contributions are based on the employees gross
  pay without deducting pension contributions,
  capital allowances, charitable donations or
  personal allowances.
• Earnings do not includemileage allowance not
  exceeding approved rateemployer contribution to
  approved pension schemebenefits in kind which
  are not convertible into cash (but see NIC Class
  1A) ..and others
• Earnings do include non-cash vouchers

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National Insurance Contributions

• Class 1A Contributions
• Benefits in kind not convertible into cash are
  exempt from Class 1 NICs (see above)
• However they are subject to Class 1A
  contributions (except for provision of
  childcare)
• Class 1A12.8 of the amount of the benefit
  payable by the employer only
• Note that the benefit in kind is the amount which
  will be assessed on the employee under Employment
  Income

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National Insurance Contributions

• Class 1B contributions
• Employers who pay their employees income tax
  liabilities via a PAYE settlement agreement must
  pay Class 1B contributions
• Class 1B contributions are paid on BOTH the
  emoluments subject to NIC in the settlement AND
  on the tax paid by the employer.
• Class 1B rate is 12.8
• Only the employer pays the Class 1B contribution

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National Insurance Contributions

• NI and self-employed individuals - Class 2
  Class 4Class 2 Paid by self employed
  individuals and are due at the flat rate of 2.10
  per week for 2006-07If the earnings (profits)
  from self-employment (see below) are less than
  4,465 in 2006-07 then an application can be made
  for small earnings exemption.
• Individual may continue to pay contributions to
  maintain rights to benefits

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National Insurance Contributions

• NI and self-employed individuals - Class 2
  Class 4 ctd. Class 4 Self-employed individuals
  make an additional contribution based on Trading
  Income.
• Trading Income is after adjusting for capital
  allowances, balancing charges, trading losses and
  trade charges but before any personal pension
  premiums.

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National Insurance Contributions

• NI and self-employed individuals - Class 2
  Class 4 ctd. Class 4 the rates for 2006-07
  are Profits up to 5,035
  NilProfits 5,035 to 33,540
  8Profits above 33,540
  1

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National Insurance Contributions

• Class 3
• Any individual can pay voluntary contributions of
  7.55 per week (2006-07) to maintain rights to
  some State benefits.

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National Insurance Contributions

• Maximum contributions payableWhere a person has
  more than one employment / self-employment there
  is a maximum limit for contributions payable from
  all sources.
• Maximum Class 1 and 2 contributions53 primary
  Class 1 NICs at the maximum weekly rate53 x 11
  (645-97) 3194.84
• Maximum Class 1, 2 and 4 contributions53 Class
  2 NICs plus maximum Class 4 53 x 2.10
  8(33,540-5,035) 2391.70

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National Insurance Contributions

• Employed v. Self-employed
• The NI burden on self employed tends to be lower
  than that on employees - eg
• Two single people - one employed, one
  self-employed each have annual gross income of
  18,000. Show their NI contributions for 2006-07.
• NI Contributions
  Employed Self-
• employed
• Class 1 (18,000-5,035)x11 1,426
• Class 2 2.10x 52
  109
• Class 4 (18,000-5,035) x 8
  1,037
• 
  1,426 1,146

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National Insurance Contributions

• Employed v. Self-employed
• Difference in contributions means important to
  distinguish
• Guidelines1 Mutual obligation2 Work an
  integral part of the organisation3 Remuneration
  and hours of work4 Economic reality5 Control