NATIONAL INSURANCE
CLASSES OF NATIONAL INSURANCE CONTRIBUTIONS
Class of
contribution
Basis of assessment
Person Liable
Class 1 Employee
A percentage based contribution levied on employee earnings in
excess of employee threshold for the tax year 2020-21 of
9500
Employee
Class 1 employer’s
A percentage based contribution levied on employee earnings in
excess of employer’s threshold for the tax year 2020-21 of
8788
Employer
Class 1A
A percentage based contribution levied on taxable employment
benefits provided to employees
Employer
Class 2
A flat rate weekly contribution
Self employed
Class 4
A percentage based contribution levied on tax adjusted trading
profits in excess of the lower profits threshold 9500 for the tax
year 2020-2021
Self Employed
ILLUSTRATION 1
Catalina has been self-employed for many years. She employs a full-time salesman
and six part-time employees. Catalina' tax adjusted trading profits for the tax year
2020/21 are £86,000.
The salesman earns a salary of £14,000 p.a. and is provided with a company car.
The remaining members of staff earn £3,000 p.a.
Explain which classes of NICs are payable by Catalina.
Catalina will pay:
Flat rate class 2 contributions in respect of her self-employed business .
Class 4 contributions in respect of her self-employed business based on her tax
adjusted trading profits as they are in excess of £9,500
Employer's class 1 contributions as Catalina is an employer. The contributions are
based on the salesman's salary of £14,000 as his earnings are in excess of £8,788.
Class 1A contributions based on the assessable employment benefit arising from the
provision of a company car to the salesman.
Notes: (1) No NICs are payable in respect of the remaining six part-time staff
members as they each earn less than £8,788 p.a. (2) The salesman is liable to pay
employee class 1 contributions based on his salary of £14,000.
NIC’S PAYABLE IN RESPECT OF EMPLOYEES
The following NICs are payable in respect of employees:
Class 1 employee contributions
Class 1 employer's contributions
Class 1A contributions.
CLASS 1 EMPLOYEE AND EMPLOYER'S NICS
Both the class 1 contribution paid by the employee and the class 1 contribution paid by the
employer are a percentage based contribution levied on the 'gross earnings' of the employee in
excess of the earnings threshold.
The earnings threshold for the tax year 2020/21 is £9,500 for employees and £8,788 for
employers.
Earnings' for the purpose of class 1 NICs consists of:
any remuneration derived from the employment, which is
paid in cash or assets which are readily convertible into cash
Gross earnings include:
wages, salary, overtime pay, commission or bonuses sick pay, including statutory sick
pay tips and gratuities paid or allocated by the employer ,reimbursement 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 (e.g. employer contributions into a pension scheme, a
mobile phone, etc.)
mileage allowance
expenses paid for or reimbursed by the employer for which an income tax deduction
would be available e.g. employment related travel and subsistence costs.
ILLUSTRATION 2
Lia and Ariel are employed by Garden Gnomes Ltd and both pay into the company's
occupational pension scheme. Their remuneration for the tax year 2020/21 is as
follows. Calculate Lia and Ariel's gross earnings for class 1 NIC purposes.
LIA
ARIEL
Salary
30000
55000
Bonus
0
4000
Car benefit
0
3950
Employer’s pension contributions
2300
4575
Employee’s pension contribution
1650
3800
SOLUTION
Lia
Ariel
Salary
30000
55000
Bonus
0
4000
Gross earnings
30000
59000
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.
CLASS 1 EMPLOYEE CONTRIBUTIONS
Note that class 1 employee contributions: are not an allowable deduction for the
purposes of calculating the individual employee's personal income tax liability
Do not 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 tax adjusted trading profits
The employee contributions payable are calculated as:
12% on gross earnings between £9,500 and £50,000
2% on gross earnings in excess of £50,000
CLASS 1 EMPLOYER'S CONTRIBUTIONS
Employer's contributions are an additional cost of employment and are a deductible
expense when calculating the employer's tax adjusted trading profits.
Employer's contributions are calculated as: 13.8% on all gross earnings above
£8,788
ILLUSTRATION 3
Millie is employed by Blue Forge Ltd and is paid an annual salary of £49,000. Millie
is also provided with the following taxable benefits
Company Car 5000
Vouchers for the local gym 2000
Calculate Millie's and Blue Forge Ltd's class 1 NIC liability due for the tax year
2020/21.
Class 1 NICs are due on annual earnings of £51,000 (salary £49,000 and vouchers
£2,000). The company car is a non-cash benefit and is therefore not subject to class 1
NICs.
Millie ‘s class 1 employee’s NIC
50000-9500 * 12%= 4860
51000-50000*2%= 20
4880
Blue forge Ltd’s class 1 employer ‘s contribution= 51000-8788* 13.8%= 5826
PAYMENT OF CLASS 1 CONTRIBUTIONS
The administration and payment of class 1 NICs is carried out by the employer as
follows:
The employer is responsible for calculating the amount of class 1 employee and
employer's contributions at each pay date
Employee contributions are deducted from the employee's wages or salary by the
employer and paid to HMRC on the employee's behalf
The total employee and employer's contributions are payable by the employer to
HMRC, along with income tax deducted from the employees under PAYE
NIC EMPLOYMENT ALLOWANCE
Employers are able to claim up to £4,000 relief p.a. from their class 1 employer's
NIC payments.
Note that the allowance
 cannot be used against any other classes of NICs (e.g. class 1A)
is not available to companies where a director is the sole employee
is only available to employers with total class 1 employer's contributions <100000 in
the previous year.
CLASS 1A NICS
Employers are required to pay class 1A contributions on taxable benefits provided to
employees.
No class 1A contributions are payable in respect of:
exempt benefits (i.e. those benefits which are exempt from income tax
. 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: 13.8% 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 tax adjusted trading profits.
ILLUSTRATION 4
Simon is employed by Dutton Ltd at an annual salary of £53,000.
He was provided with a company car throughout the tax year 2020/21 that had a
list price of £15,000. The car has CO2 emissions of 133g/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 the tax year 2020/21 in respect of Simon. Ignore the employment allowance
Class I NICs
Employee Class 1 NIC
( 50000-9500)* 12%= 4860
(53000-51000)*2%=60
Total
=4920
Employer s class 1NIC
(53000-8788)*13.8%=6101
Class 1A NICs
Company Motor Car
14% +(130-50)/5=29%* 15000= 4350
Private fuel= 29%*24500= 7105
Taxable benefits = 11455
Employer’s class 1a NIC 11455*13.8%=1581
ILLUSTRATION
5
Blessing is paid £25,000 per year and had taxable benefits for the tax year 2020/21 of:
Company Motor car
5250
Private fuel provided by company
4200
Beneficial Loan
2600
Vouchers to be used at local departmental
store
250
The company also provided blessings with a mobile phone, which cost 135.
Contributions into her personal pension scheme were on following
Employer’s contribution
2540
Employee contribution
1380
Calculate the employee's and the employer's class 1 and class 1A NIC liabilities for the tax year
2020/21 in respect of Blessing. Ignore the employment allowance.
NICS PAYABLE IN RESPECT OF SELF-EMPLOYED
INDIVIDUALS
The following NICs are payable by self-employed individuals:
Class 2 contributions
Class 4 contributions.
Class 2 contributions
Contributions are payable if the tax adjusted trading profits of the business for the tax
year exceed the small profits threshold of £6,475
Class 2 contributions are a flat rate payment of £3.05 per week.
The maximum total class 2 NICs payable for the tax year 2020/21 is therefore £159
(£3.05 × 52 weeks).
CLASS 4 CONTRIBUTIONS
In addition to class 2 NICs, a self-employed individual may also be liable to class 4
NICs.
Class 4 NICs are a percentage based contribution levied on the 'profits' of the
individual in excess of £9,500 for the tax year 2020/21
The contributions payable are calculated as:
9% on profits between £9,500 and £50,000.
2% on profits in excess of £50,000
ILLUSTRATION
6
James has been trading as a self-employed painter and decorator since 2001. His
tax adjusted trading profits for the tax year 2020/21 are £62,000 and he has
trading losses brought forward of £10,000
His wife, Poppy, is a part-time mobile hairdresser. Her tax adjusted trading profits
for the tax year 2020/21 are £10,560.
Calculate the class 4 NICs payable by James and Poppy for the tax year 2020/21
James
James
Tax adjusted trading profits
62000
Less: trading losses brought forward
(10000)
Profit
52000
Class 4 NIC
(50000-9500)*9%
3645
(52000-50000)*2%
40
3685
Poppy
(10560-9500)*9%
95
ILLUSTRATION 7
Diane has been a self-employed computer consultant for many years. Her tax adjusted
trading profits for the tax year 2020/21 are £52,500.
Diane employs one employee, a full-time personal assistant, at a salary of £38,300 p.a.
She also provides the assistant with a diesel-engine company car, which has a list price of
£13,500 and CO2 emissions of 114g/km. Diane pays for the assistant's private and
business fuel.
Diane's class 1 employer's liability was £3680 in the previous tax year.
Calculate the total NICs that Diane must account for to HMRC in respect of the tax year
2020/21.
DIANE
Flat rate class 2 contributions in respect of the business.
Class 2 NIC = 3.05*52= 159
Class 4 contributions in respect of the business based on tax adjusted trading profits
as they are in excess of £9,500.
Class 4 NIC
(50000-9500)*9%=3645
( 52500-50000)*2%=50
3695
Class 1 Employer’s contribution
(38300-8788)*13.8%=4073- 4000 = 73
Class 1A contributions based on the benefit arising from the provision of a company
car to the personal assistant.
Diesel car
18%+ (110-50)/5= 29%*13500 = 3915
Private fuel 29%*24500 = 7105
Taxable benefit
Employer’s Class 1A NIC
11020 *13.8%= 1521
11020