NATIONAL
INSURANCE
Presented by :
Rachel Kuan 08B1902
Tiffany Chiam 08B1901
Michelle Chang 08B1928
Emily Wee 08B1709
DEFINITION


Those with earned income will contribute to the
National Insurance fund from which benefits are
paid.
These benefits include retirement pensions,
unemployment pay, widow’s benefit, invalidity
benefit, and certain sickness and maternity
benefits.
NATIONAL INSURANCE
CONTRIBUTIONS
EMPLOYED PERSON
PAID BY
EMPLOYEE
CLASS 1
PRIMARY
SELF-EMPLOYED PERSON
PAID BY SELF-EMPLOYED
PERSON
PAID BY
EMPLOYER
CLASS 1A
CLASS 1
SECONDARY
CLASS 4
CLASS 2
CLASSES OF NATIONAL INSURANCE CONTRIBUTIONS
The amount of National Insurance Contribution(NIC) a person pays and the
payment of contributions depend on the class of contribution.
Class of contribution
Basis of assessment
Person liable
Class 1 Primary
A percentage-based
contribution levied on
employees earnings in
excess of ₤5,715 for 2009/10
Employee
Class 1A
A percentage-based
contribution levied on
assessable benefits
provided to employees
Employer
Class 2
A flat rate weekly
contribution
Self-Employed
Class 4
A percentage-based
contributions levied on
taxable trading profits in
excess of ₤5,715 for 2009/10
Self-employed
Class 1 Secondary
Employer
EXAMPLE
Stephen works for Camberley Cars Ltd on a part-time basis earning a salary of ₤19,000 p.a. He is
provided with a company car; petrol for both business and private mileage; and a place is provided for his
daughter at the company’s workplace nursery while he is working for them.
Stephen also runs a small bed and breakfast business from his home. In the year to 31 March 2010 his
taxable trading profit from the business is ₤10,300.
Explain which classes of NICs are payable by Stephen and Camberley Cars Ltd in respect of 2009/10.
Answer :

Class 1 primary contributions based on his salary from Camberley Cars Ltd of ₤19,000 as his earnings are
in excess of ₤5,715.

Flat rate Class 2 contributions in respect of his bed and breakfast business.

Class 4 contributions in respect of his bed and breakfast business based on his taxable trading profits as
they are in excess of ₤5,715.
Camberley Cars Ltd will pay :

Class 1 secondary contributions based on Stephen’s salary of ₤19,000 as his earnings are in excess of
₤5,715.

Class 1A contributions are based on the assessable employment benefit arising from the provision of a
company car and private petrol to Stephen.
Note : Class 1A contributions are not required in respect of the provision of a nursery place as it is an
exempt benefit.
NICS PAYABLE IN RESPECT OF EMPLOYEES
The following NICs are payable in respect of employees:
 Class 1 primary contributions
 Class 1 secondary contributions
 Class 1A contributions
The definition of earnings for Class 1 NIC purposes
‘Earnings’ for the purpose of Class 1 NICs consists of any
remuneration derived from the employment and paid in cash or
assets which are readily convertible into cash.
The calculation of Class 1 NICs is based on gross earnings with no
allowable deductions.
GROSS EARNINGS INCLUDES :

Wages, salary, overtime pay, commission or
bonus

Sick pay, including statutory sick pay

Tips and gratuities paid or allocated by employer


Payment of the cost of travel between home and
work
Vouchers (exchangeable for cash or non-cash
items, such as goods).
GROSS EARNINGS DO NOT INCLUDE :

Exempt employment benefits.

Most taxable non-cash benefits except remuneration received in the form of
financial instruments, readily convertible assets and non-cash vouchers

Tips received from customers

Mileage allowance received from the employer provided it does not exceed
the HMRC approved allowance mileage rate of 40p per mile

Business expenses paid for or reimbursed by the employer, including
reasonable travel and subsistence expenses.
Note : Dividends are not subject to NICs, even if they are drawn by a
director/shareholder in place of monthly salary.
EXAMPLE
Janet and John are employed by Garden Gnomes Ltd. Their
remuneration for 2009/10 is as follows :
Janet
₤
John
₤
Salary
30,000
55,000
Bonus
NIL
4,000
Car Benefit
NIL
3,950
Employer’s occupational pension scheme
contribution
2,300
4,575
Employee’s occupational pension scheme
contribution
1,650
3,800
Calculate Janet and John’s ‘gross earnings’ for Class 1 NIC
purposes.
ANSWER TO EXAMPLE
Janet
₤
John
₤
Salary
30,000
55,000
Bonuses
NIL
4,000
Gross earnings for Class 1 NICs
30,000
59,000
Notes
•
The employer’s pension contributions are excluded as they are
an exempt benefit.
•
The employee’s pension contributions are ignored as these are
not deductible in calculating earnings for NIC purposes.
•
The car benefit is excluded as it is non-cash benefit which will
be assessed to Class 1A NICs, not Class 1.
ELIGIBLE EMPLOYEES
Class 1 contributions are payable where the
individual:
 Is
employed in the UK, and
 Is
aged 16 or over, and
 Has
earnings in excess of the lower earnings
threshold of ₤5,715 for 2009/10.
CLASS 1 PRIMARY CONTRIBUTIONS
Class 1 primary contributions are payable by employees:

Aged 16 or over until

Attaining pensionable age (65 for a man, 60 for a woman.)
The employer is responsible for calculating the amount of Class 1 primary
NICs due and deducting the contributions from the employee’s wages. Note
that Class 1 primary contributions:

Are not an allowable deduction for the purposes of calculating the
individual employees personal income tax liability.

Do no represent a cost to the business of the employer, as they are
ultimately paid by the employee. Therefore, they are not a deductible
expense when calculating the employer’s taxable trading profits.
CALCULATING CLASS 1 PRIMARY
CONTRIBUTIONS
Primary contributions are normally calculated by reference to an employee’s
earnings period:

If paid weekly, the contributions are calculated on a weekly basis (The
apportioned lower limit is ₤110 per week (₤5,715/52) and the upper limit is
₤844 a week (₤43,875/52)

If paid monthly, the contributions are calculated on a monthly basis (The
apportioned lower limit is ₤476 per month(₤5,715/12) and the upper limit is
₤3,656 a month (₤43,875/12)
The primary contributions payable are calculated as:

11% on gross earnings between ₤5,715 and ₤43,875

1% on gross earnings in excess of ₤43,875
CLASS 1 SECONDARY CONTRIBUTION
It is payable by employers in respect of employees:
•Age
16 or over
•Until
the employee ceases employment
There is no upper age limit for employer contributions, the
employer is liable in full even if the employee is above
pensionable age.
Secondary contributions are an additional cost of employment
and are a deductible expenses when calculating the
employer’s taxable trading profits.
CALCULATING CLASS 1 SECONDARY
CONTRIBUTIONS

Calculated by reference to an employee’s earnings
period. (calculations should be performed on an annual
basis unless you are clearly told otherwise)

12.8% of all gross earnings above £5,715.

Notes to be taken account:
No upper earnings limit
 No change in rate of NIC payable for employer contributions.

EXAMPLE:
Millie is employed by Blue Forge Ltd and is paid an
annual salary of £43,000. Millie is also provided with the
following taxable benefits:
£
Company car
5,000
Vouchers for the local gym
2,000
Calculate the employee’s and the employer’s Class 1
NIC liability due for 2009/10.
ANSWER:
Class 1 NICs are due on annual earning of
£45,000 (salary £43,000+voucher £2,000)
 The company car is a non cash benefit and is not subject
to Class 1 NICs.


Employee’s Class 1 NICs
(£43,875- £5,715)@11%
(£45,000-43,875)@1%

Employer’s Class 1 NICs
(£45,000- £5,715)x 12.8%
£
4,198
11
4,209
5,028
COMPANY DIRECTORS


Special rules apply to company directors to
prevent the avoidance of NICs by paying low
weekly or monthly salaries, and then taking a
large bonus in a single week or month.
Therefore, when an employee is a company
director, his Class 1 NICs are calculated as if he
had an annual earnings period.
PAYMENT OF CLASS 1 CONTRIBUTIONS
Administration and payment of Class 1 NICs is carried out by the
employers as follows:




The employer is responsible for calculating the amount of Class 1
primary and secondary contributions at each pay date.
Primary contributions are deducted from employee’s wages by the
employer and paid to HMRC on the employee’s behalf.
The total primary and secondary contributions are payable to the
employer by the HMRC, along with income tax deducted from the
employees under PAYE.
The payment is normally due on the 19th of each month (i.e. due not
later than 14 days after the end of each PAYE month).
CLASS 1A NICS

Employers are required to Class 1A contributions on
‘taxable benefits’ provided to employees earning at a rate
of £8,500 pa and directors.

No Class 1A contributions are payable in respect of:
Exempt benefits
 Benefits already treated as earnings and assessed to Class 1
NICs, such as remuneration received in the form of non cash
vouchers.

The contributions are calculated as :
 12.8% on the value of the taxable benefits.
Class 1A contributions are an additional cost of employment
and are a deductible expense when calculating the employer’s
taxable trading profits.
EXAMPLE:
Simon is employed by Dutton Ltd at an annual
salary of £52,000.
He was provided with a company car throughout
2009/10 that had a list of price of £15,000. The
car has CO² emissions of 193 g/km. Petrol for both
business and private mileage is provided by his
employer.
Calculate the employee’s and the employer’s Class 1
and Class 1A NIC liabilities due for 2009/10.
ANSWERS:

Class 1 NICs
Employee’s Class 1 NICs
(£43,875- £5,715) x 11%
(£52,000- £43,875) x 1%
Employer’s Class 1 NICs
(£52,000- £5,715) x 12.8%
£
4,198
81
4,279
5,924
EXAMPLE… CONTINUE…

Class 1A NICs
Simon’s taxable benefits for Class 1A are as
follows:
Company motor car
£
15% + [(190-135)/5]= 26% x £15,000
3,900
Private fuel provided by company
(26% x £16,900)
4,394
Taxable benefits for Class 1A
8,294
Employer’s Class 1A NICs (£8,294@12.8%)
1,062
CAR BENEFIT CHARGE (CHAPTER 4)
CO² emissions per km
120 grams or less
121-135 grams
Each complete additional 5 grams
Emission above 135 grams
Petrol car%
10
15
Diesel car%
13
18
An additional 1% is added
to the 15% or 18% up to a
maximum % of 35%
Note: Always round down the g/km to the nearest full
number divisible by 5.
NICS PAYABLE IN RESPECT OF SELF-EMPLOYED
INDIVIDUALS
NICs which are payable by self-employed individuals.
Class 2 contributions
 Class 4 contributions

CLASS 2 CONTRIBUTIONS
Payable by individuals:
Aged 16 or over until
 Attaining pensionable age (65 man, 60 woman)

Amount payable:


Class 2 contribution are a flat rate payment of £2.40 per week.
Maximum total Class 2 NICs payable for 2009/10 is therefore £125
(£2.40 x 52 weeks).
Note that Class 2 Contributions:
Not an allowable deduction for the purposes of calculating the
individual’s income tax liability.
 Not a deductible expense when calculating the business’ taxable
trading profits.

Class 2 Contribution are collected by HMRC on a monthly basis by
direct debit or by quarterly billing in arrears.
CLASS 4 CONTRIBUTIONS
In addition to Class 2 NICs, a self-employed individual may also be liable to
Class 4 NICs.


Class 4 contributions are payable by self-employed individuals who:
At the start of the tax year, are aged 16 or over.
They continue to pay until:
The end of the tax year in which they attain pensionable age (65 for a man, 60
for a woman).
Note that Class 4 contributions:


Are not an allowable deduction for the purposes of calculating the individual’s
income tax liability.
Are not a deductible expense when calculating the business’ taxable trading
profits.
THE DEFINITION OF CLASS 4 PROFITS
‘Profits’ for the purposes of Class 4 NICs consists of:

The taxable trading profits of the individual that are assessed for income tax
after deducting trading losses (if any)
Note that ‘profits’ for Class 4 NICs are before deducting the individual’s
personal allowance that is available for income tax purposes.
If the individual has more than one business, the aggregate of all profits from all
self-employed occupations are used to calculate the Class 4 NIC liability.
Calculating Class 4 NICs
The contributions payable are calculated as:

8% on profits between ₤5,715 and ₤43,875

1% on profits in excess of ₤43,875
EXAMPLE
James has been trading as a self-employed painter and
decorator since 1998. His taxable trading profits for
2009/10 are ₤56,000 and he has trading losses brought
forward of ₤10,000.
His wife, Poppy, is a part-time mobile hairdresser. Her
taxable trading profits for 2009/10 are ₤6,560.
Calculate the Class 4 NICs payable by James and
Poppy for 2009/10.
ANSWER TO EXAMPLE
James
Taxable trading profits for 2009/10
Less: Trading losses brought forward
Profits for Class 4 Purposes
Class 4 NICs
(₤43,875-₤5,715) x 8% (maximum)
(₤46,000-₤43,875) x 1%
₤
56,000
(10,000)
46,000
₤
3,053
21
3,074
Poppy – Class 4 NICs
(₤6,560-₤5,715) x 8%
68
PAYMENT OF CLASS 4 CONTRIBUTIONS
Class 4 contributions are paid to HMRC at the same time as the individual’s
income tax due under self assessment, as follows:
Payment
Due Date
Amount
Payments on account
• 31 January in the tax
year (i.e. 31.1.2010 for
2009/10)
Two equal installments of:
•31 July following the
end of the tax year (i.e.
31.7.10 for 2009/10)
Balancing payment
•31 January following the
end of the tax year (i.e.
31.1.11 for 2009/10)
•50% of the amount paid by
self-assessment in the
preceding year
Under or overpayment for
the year
TOTAL NICS PAYABLE BY A SELFEMPLOYED INDIVIDUAL
A self-employed individual pays both Class 2 and Class 4 NICs in respect of
his trading profits.
In addition, if the self-employed individual employs staff, he will be
required to account for:

Class 2 and Class 4 NICs in respect of his trading profits.

Class 1 primary, Class 1 secondary and Class 1A NICs in respect of
earnings and benefits provided to employees.
EXAMPLE
Diane has been a self-employed computer consultant for
many years. Her taxable trading profits for 2009/10 are
£50,000.
Diane employs a full time personal assistant at a salary
of £15,800 p.a. She also provides the assistant dieselengine company car, which has a list price of £13,500
and CO² emission of 161g/km. Diane pays for the
assistant’s private and business fuel.
Calculate the total NICs that Diane must account for
to HMRC in respect of 2009/10.
ANSWER:
1. Flat rate class 2 contribution in respect of the business.
Class 2 NICs
(£2.40 x 52 weeks)
£ 125
2. Class 4 contributions in respect of the business based on taxable
trading profits as they are in excess of £5,715.
Class 4 NICs
£
(£43,875- £5,715) x 8%
3,053
(£50,000- £43,875) x 1%
61
3,114
3. Class 1 secondary contributions as Diane is an employer, based on
her personal assistant’s salary of £15,800.
Employer’s Class 1 NICs
(£15,800- £5,715) x 12.8%
£1,291
EXAMPLE… CONTINUE…
4. Class 1A Contributions based on the benefit arising from the provision
of a company car to the personal assistant.
Company motor car
£
18% + [(160-135)/5] = 23% x £13,500
3,105
Private fuel provided (23% x £16,900)
3,887
Taxable benefits for Class 1A
6,992
Employer’s Class 1A NICs
(£6,992 @ 12.8%)
895
5. Class 1 Primary contributions are levied on the personal assistant.
However, it is Diane’s responsibility to deduct the NICs from the
assistant’s salary and pay them to HMRC along with the Class 1
secondary contribution on the 19th of each month.
Employees’s Class 1 NICs
(£15,800- £5,715) x 11%
1,109
EXAMPLE… CONTINUE…
Summary:
£
Class 2
Class 4
Class 1 secondary
Class 1A
Diane’s total liability
Class 1 primary
Total amount Diane must account for to HMRC
125
3,114
1,291
895
5,425
1,109
6,534
~ The End ~
Thank You =)