All earners pay National Insurance contributions (NICs) on their earnings. Employers pay employer contributions for each employee and collect and forward their employees’ contributions.
Paying contributions entitles an individual to a state pension. But most people will need to make additional private provisions. This briefing explains:
- Who pays what.
- An employer’s responsibilities.
- How to reduce the NICs you pay.
- How NICs affect an individual’s entitlements.
1. Employer contributions
There are four classes of National Insurance contributions (NICs). Employers are only concerned with Class 1, 1A and sometimes 1B. Class 2, 3 and 4 apply to the self-employed and the unemployed (see box “Self-employed and unemployed”).
1.1 Employers pay Class 1 NICs for most of their employees, including:
- company directors
- casual and part-time workers
- short-term contract workers (including those who would normally be classed as self-employed)
1.2 There are exceptions. Employers do not have to pay Class 1 NICs for employees:
- Who are under 16.
- Who earn £146 or less a week.
- Start-up employers outside London and the south-east do not have to pay £5,000 in NICs for the first ten members of staff hired in the first year of business. All businesses set up after 22 June 2010 benefit.
1.3 Employers whose employees are not contracted-out of the State Second Pension pay:
- 13.8% on all weekly pay of £144 or more. There is no upper limit on the amount of Class 1 NICs an employer can pay.
1.4 Employers whose employees belong to a ‘contracted-out’ final salary occupational pension scheme (ie one where the pension is linked to the employee’s pay at or near retirement) pay:
- 9.3% on earnings from £144 (the primary threshold) to £817 (the upper earnings limit), and 13.8% on earnings above this.
Employer contributions are slightly higher for contracted-out money purchase schemes (eg where the pension is linked to the amount paid into the fund).
1.5 Employers pay Class 1A NICs at 13.8% on most benefits provided to employees.
- NICs on company cars and fuel for private use are paid on the same ‘cash equivalent’ as the figure used to calculate the employee’s tax liability.
- As with tax, benefits given to lower-paid employees (earning less than £8,105 a year, including benefits and expenses in certain circumstances, excluding directors) are exempt from Class 1A NICs.
Where benefits are provided by way of a lump sum settlement, after the year end, employers pay Class 1B NICs on the amount of the settlement at a rate equivalent to Class 1A NICs (13.8%).
1.6 Provision of some benefits by employers is exempt from Class 1A NICs (see 5.3).
2. Employee contributions
2.1 Employees pay:
- No contribution if weekly pay is below £146 a week.
- 12% on earnings between £146 and £817 a week in the 2012/13 tax year plus 2% on all earnings over £817 a week. The 12% rate is reduced to 10.8% if the employee is a member of a company pension scheme contracted-out of the State Second Pension.
2.2 There are special rules for some employees.
- Married women and widows who opted for ‘reduced liability’ before 12 May 1977 pay 5.85% NICs on earnings between £146 and £817 a week, plus 2% on all earnings above £817 a week.
- Employees with more than one job pay NICs for each job that earns more than £146 a week.
- Those over the state pension age do not pay NICs once they provide their employer with a Certificate of Age Exception. The employer still pays NICs at the full rate.
3. Making payments
3.1 You must calculate NICs as a percentage of gross pay (before Pay As You Earn and pension contributions).
- Gross pay includes wages/salaries, bonus payments, fees, overtime, petrol allowances (unless charged to a company account), profit-related pay and employees’ personal expenses such as telephone bills where paid by the employer for the employee.
- You do not normally make contributions on redundancy payments, payments in lieu of notice, termination payments, pensions, meal vouchers, most childcare, expenses or tips not paid by the employer.
- Contributions are still paid if pay continues during sickness or any other absence.
3.2 The earnings period is the period since the last pay day, typically a week or a month.
- For most directors the earnings period is annual, irrespective of when they are paid.
This captures all of a director’s earnings.
3.3 You deduct NICs on pay day, at the same time as Pay As You Earn (PAYE).
3.4 You pay NICs to HM Revenue & Customs (HMRC) Accounts Office each month. This can be done quarterly if your average monthly PAYE, NIC and student loan payments are below £1,500.
- NIC payments must reach the Accounts Office by the 19th of the next month.
This is separate from your PAYE Tax Office.
- Include form P30B with your payment.
3.5 End of year payments are due by the following deadlines:
- 19 April for outstanding Class 1 NICs.
- 19 July for any outstanding Class 1A NICs on cars and fuel and other chargeable benefits. A special payslip will be sent to employers in April to accompany payments of Class 1A NICs. Interest is charged on late payments.
4. Filing records with HMRC
4.1 You must keep records of gross pay, PAYE and NICs deducted, statutory maternity pay (see 6.4), paternity pay, adoption pay and if you wish, statutory sick pay (see 6.3).
- Keep these details on a Deductions Working Sheet, form P11, or computerised records.
- Prepare a P11 for each employee at the start of the tax year or when they start working for you.
Fill out the relevant columns each pay day.
- You must also record payments on form P32 or in the payslip booklet P30BC.
4.2 File the following online (see margin note) or with your PAYE Tax Office:
- Form P14 (or substitutes), detailing each employee’s total pay and deductions, by 19 May. You fill this in by adding up the total boxes on each P11 for the year.
- Form P35 by 19 May.
This includes a summary of all your P14s.
- Form P11D(b) declaring and adjusting Class 1A NICs, by 6 July.
Penalties are charged on forms received after the deadlines.
4.3 You have the following obligations when taking on new employees:
- Ask them for their P45 (given to them by their previous employer) and National Insurance (NI) number.
- If an employee (including a part-time or casual employee) does not have a P45, and is going to work for you for more than one week, fill in a P46 (or collect the relevant information) and send it to the PAYE Tax Office. If the employee earns less than £139 a week, and has ticked statement B on the form, the P46 should be kept by you.
- If the employee is going to work for you for less than a week, they can contact their local Social Security Office and ask for an NI number card.
- If the employee has never had an NI number, they must personally apply for one at their local Social Security office. You must keep a record of their full name, date of birth, sex and address.
- If you are in doubt whether somebody is employed or self-employed, either speak to a professional adviser or ask your PAYE Tax Office or Contributions Office (see 7). You should deduct NICs from their pay until a decision is made.
4.4 Give all employees still working for you at the end of the tax year the following documents by the following deadlines:
- Form P60 showing how much PAYE and NICs were paid, by 31 May.
- Form P11D or P9D, showing the employees’ benefits and expenses in the tax year, by 6 July.
You must keep all P11 forms and pay records for at least three years after the end of the tax year to which they relate.
5. Reducing contributions
There are a number of ways to reduce the contributions you are obliged to pay.
5.1 Offer employees a contracted-out company pension scheme. This reduces contributions for everybody.
5.2 Structure your pay so that staff earn just below the NI threshold (but ensure you are paying the national minimum wage).
5.3 Some taxable ‘benefits in kind’ are not subject to employer (or employee) NICs.
- Provision of most employer childcare facilities, counselling, subsidised meals and light refreshments are not liable to NICs provided they are made available to all employees on the same terms.
Nor are long-service awards of goods (of up to £50 per year of service to employees who have served for at least 20 years) or employer-financed annual parties (costing £150 per head per year). However, payment of cash or cash vouchers is subject to NICs.
Paying NICs entitles individuals to certain benefits. As the NI fund is currently in deficit, you are unlikely to receive back what you pay in.
6.1 You are currently entitled to a full basic state pension of £107.45 a week if you have paid NICs for about 90% of your working life.
- The state pension is reduced if you have made fewer contributions.
- Employees can apply to the Pension Service for a forecast of their pension.
You can apply online at https://secure.thepensionservice.gov.uk/statepensionforecast/ or complete a BR19 form.
- The pension age will be equalised for both men and women from 2020.
- There is no default retirement age (DRA) and employers will no longer be able to retire employees by default.
6.2 You are entitled to the State Second Pension if you have paid standard-rate Class 1 NICs between the upper and lower earning limits in any tax year since April 1978.
- The pension will depend on the amount of contributions made.
- The maximum is 20% of earnings between the upper and lower earnings limit.
6.3 You are entitled to statutory sick pay (SSP) if you earn £107 or more per week. SSP is currently £85.85 a week.
- Employers can opt out of the scheme as long as they agree to pay (at present) £85.85 a week or more to employees.
- Many employers maintain full pay.
SSP is subject to NICs if paid at a rate in excess of £146.
6.4 You are entitled to statutory maternity pay (SMP) or statutory paternity pay (SAP) if you meet certain conditions.
- You need to have been continuously employed for 26 weeks and to have paid Class 1 contributions on earnings of at least £107 a week for the eight weeks up to the 15th week before the baby is due.
- You receive 90% of your average weekly earnings for the first six weeks.
- You receive £128.73 a week (or 90% of your average earnings if lower) for the remaining 33 weeks of the ordinary maternity leave period.
Many employers pay their employees more than this statutory minimum.
- Employers can recover 92% of the SMP paid to their employees.
- Employers who do not pay more than £40,000 of Class 1 NICs in the tax year get Small Employer’s Relief.
This recovers 100% of SMP and an additional 4.5% as compensation for the NICs paid.
Fathers with up to 26 weeks’ continuous service have the right to take up to 26 weeks additional paternity leave and pay (APL&P). The current two-week period of leave is re-named ‘ordinary paternity leave’. The eligibility criteria are the same. The mother (or primary adopter) must have returned to their work before the additional leave can be taken. This means it cannot be taken within 20 weeks of the birth or placement. You also need to notify your employer eight weeks in advance that you wish to start taking APL.
7. Where to get help
7.1 You will probably find it easier to operate your payroll and manage the deduction of PAYE and NICs by:
- Using the services of a specialist payroll agent or bureau. Payroll agents will obtain any necessary PAYE forms and tables.
- Using specialist software. This enables you to use your own forms.
- Making end-of-year returns electronically via the HMRC website at www.hmrc.gov.uk.
Electronic payments and online filing are compulsory for large businesses.
It is now compulsory for all businesses to file end-of-year returns online.
The operation of the PAYE and NICs systems remains your legal responsibility.
7.2 HMRC and the Contributions Office can help employers.
- The employer’s helpline (08457 143 143) deals with NIC and PAYE enquiries.
Self-employed and unemployed
The self-employed pay Class 2 and Class 4 NICs.
A Class 2 NICs cost a standard £2.65 a week, payable to the Contributions Office.
- Those earning less than £5,315 a year can apply to be exempt from making Class 2 contributions. Use a CF10 form.
B Class 4 NICs are payable on annual profits.
- 9% on profits between £7,225 and £42,475 plus an additional 2% on any profits above this.
HMRC collects this at the same time as income tax.
The unemployed pay no NICs. Instead they receive ‘Class 3’ National Insurance Credits.
The basic state pension is £107.45 per week for single people. Employees will need to make additional provisions by contributing to a company or personal pension.
HMRC are moving to compulsory online filing for PAYE and other taxes. If you employ more than 50 employees, you are now required to file forms P14, P35, P45 and P46 online. Businesses with fewer than 50 employees will be required to file their P45 and P46 forms online from 2011.
HMRC are moving to compulsory online filing for VAT from April 2012. All VAT payments will also have to be made electronically.