A Beginner’s Guide to National Insurance Contributions: Accountants Kent

National Insurance Contributions (NICs) are a fundamental part of the UK’s social security system, supporting essential services like the NHS, state pensions, and other welfare benefits. Understanding how NICs work is crucial for both employers and employees to ensure compliance and make the most of the benefits they provide. In this guide, we’ll break down the basics of National Insurance, including what it is, who needs to pay, and how contributions are calculated.

If you are looking for help with your NICs then Clayton Stirling can be your go to accountant in Gravesend, Kent. We have over 25 years of experience and a great reputation among our clients.

What are National Insurance Contributions?

National Insurance Contributions are payments made by employees, employers, and self-employed individuals in the UK. These contributions help fund various state benefits, such as the State Pension, Maternity Allowance, and Jobseeker’s Allowance. NICs are calculated based on earnings and are deducted from wages by employers through the Pay As You Earn (PAYE) system.

Who Needs to Pay National Insurance?

1. Employees:
   Employees aged 16 and over who earn more than the NICs threshold must pay National Insurance. The threshold is subject to change, so it’s essential to stay updated with the latest figures from HM Revenue and Customs (HMRC).
2. Employers:
   Employers must also pay NICs on their employees’ earnings above the threshold. This contribution is separate from the amount deducted from employees’ wages.
3. Self-Employed Individuals:
   Self-employed people need to pay Class 2 and Class 4 National Insurance contributions, which are calculated based on their profits.
4. Directors and Shareholders:
   Company directors and shareholders who receive income from salaries or dividends may also need to pay NICs, depending on their income levels.

Types of National Insurance Contributions

1. Class 1 Contributions:
   Paid by employees and employers on earnings above a certain threshold. These are automatically deducted by employers through the PAYE system.
2. Class 2 Contributions:
   Flat-rate contributions paid by self-employed individuals earning above the Small Profits Threshold. They ensure entitlement to basic state benefits.
3. Class 3 Contributions:
   Voluntary contributions that individuals can pay to fill gaps in their National Insurance record, which can affect their entitlement to state benefits like the State Pension.
4. Class 4 Contributions:
   Paid by self-employed individuals based on their annual profits. These contributions are calculated when submitting a self-assessment tax return.

Examples of National Insurance Payments

 

1. Class 1 National Insurance Contributions Example

For Employees:

• Primary Threshold (2023/24): Employees start paying NICs when their earnings exceed £242 per week.
• Rates:
  • 12% on earnings between the Primary Threshold (£242 per week) and the Upper Earnings Limit (£967 per week).
  • 2% on earnings above the Upper Earnings Limit.
• Example:
  • If an employee earns £1,000 per week, their NICs would be calculated as follows:
    • £242 to £967: £725 × 12% = £87
    • Above £967: £33 × 2% = £0.66
    • Total NICs = £87.66 per week

For Employers:

• Secondary Threshold (2023/24): Employers pay NICs on earnings above £175 per week.
• Rates:
  • 13.8% on earnings above the Secondary Threshold.
• Example:
  • If an employee earns £1,000 per week, the employer’s NICs would be:
    • £1,000 – £175 = £825
    • £825 × 13.8% = £113.85

2. Class 2 National Insurance Contributions Example

• Flat Rate (2023/24): Self-employed individuals pay a flat rate of £3.45 per week if their profits are above the Small Profits Threshold of £6,725 per year.
• Example:
  • If a self-employed person has annual profits of £10,000, they pay:
    • £3.45 × 52 weeks = £179.40 per year

3. Class 3 National Insurance Contributions Example

• Voluntary Contributions (2023/24): Individuals can make voluntary contributions to fill gaps in their National Insurance record, usually to qualify for a full State Pension.
• Rate:
  • £17.45 per week.
• Example:
  • If someone wants to fill a gap of one year in their record, they pay:
    • £17.45 × 52 weeks = £907.40 per year

4. Class 4 National Insurance Contributions Example

• For Self-Employed Individuals:
• Rates (2023/24):
  • 9% on profits between the Lower Profits Limit (£12,570) and the Upper Profits Limit (£50,270).
  • 2% on profits above the Upper Profits Limit.
• Example:
  • If a self-employed person has profits of £60,000, their NICs would be calculated as follows:
    • £12,570 to £50,270: £37,700 × 9% = £3,393
    • Above £50,270: £9,730 × 2% = £194.60
    • Total NICs = £3,587.60 per year

These examples illustrate how different types of National Insurance Contributions are calculated based on earnings or profits. The rates and thresholds can change annually, so it’s important to refer to the latest information from HM Revenue and Customs (HMRC).

How are National Insurance Contributions Calculated?

1. For Employees:
   Employees pay Class 1 NICs based on their earnings. The rate depends on their income level and changes annually. It’s crucial to stay informed about the current rates and thresholds to ensure accurate contributions.
2. For Employers:
   Employers must calculate their NICs based on their employees’ earnings and pay Class 1 NICs accordingly. Using payroll software can help automate this process and ensure compliance.
3. For Self-Employed Individuals:
   Self-employed individuals calculate Class 2 and Class 4 NICs based on their profits. Class 2 is a fixed weekly amount, while Class 4 is a percentage of annual profits. These are reported through the self-assessment tax return.

Benefits of National Insurance Contributions

1. State Pension:
   NICs contribute towards an individual’s State Pension entitlement, ensuring financial support during retirement. It’s essential to have a complete National Insurance record to maximize pension benefits.
2. Employment and Support Allowance (ESA):
   NICs help provide financial support to individuals who are unable to work due to illness or disability. Understanding your contribution history is important for accessing these benefits when needed.
3. Maternity Allowance and Paternity Pay:
   Contributions help fund maternity and paternity pay, offering financial support to new parents. Employers should be aware of their obligations to provide these benefits to eligible employees.
4. Other State Benefits:
   NICs also fund Jobseeker’s Allowance, Bereavement Support Payment, and other welfare benefits. Knowing your entitlement and contribution history can be valuable in accessing these services.

Conclusion: Professional Accountants Kent

Understanding National Insurance Contributions is vital for managing your financial obligations and securing access to state benefits. Whether you’re an employee, employer, or self-employed, staying informed about NICs ensures compliance with UK regulations and maximises the benefits available to you. At Clayton Stirling & Co, we can provide expert guidance on managing your National Insurance Contributions and navigating the complexities of the UK tax system. Let us help you make the most of your financial opportunities while ensuring compliance with all necessary obligations.