National Insurance Contributions (NICs)

National Insurance Contributions (NICs) are payments made by those with earned income that contribute to the National Insurance Fund, from which various benefits are disbursed including retirement pensions, jobseeker’s allowance, and more.

Definition

National Insurance Contributions (NICs) are mandatory payments made by employees and employers in the UK that contribute to the National Insurance Fund. This fund is used to finance a range of social security benefits, including retirement pensions, jobseeker’s allowance, widow’s benefits, incapacity benefit, and maternity benefits. There are six different classes of NICs, each applicable based on the type of earned income a person receives.

Classes of National Insurance Contributions:

  • Class 1 Contributions: Paid by employees and employers. Employees (primary contributions) pay 12% on weekly earnings between £155 and £827, and 2% on weekly earnings above that threshold. Employers (secondary contributions) pay a standard rate of 13.8%.

  • Class 2 Contributions: Previously a flat-rate contribution paid by the self-employed, now abolished.

  • Class 3 Contributions: Voluntary contributions at a flat rate (£14.10 per week in 2016-17) paid by those who wish to maintain their contribution record.

  • Class 4 Contributions: Paid by the self-employed at a rate of 9% on income between £8060 and £43,000 per year, and 2% on income above that.

  • Class 1A Contributions: Paid by employers on benefits in kind provided to employees, such as company cars. The current rate is 13.8%.

  • Class 1B Contributions: Paid by employers on any items included in a PAYE settlement agreement with HM Revenue and Customs.

Examples

  1. Employee and Employer Contributions: Jane earns £900 per week. She pays 12% on her earnings between £155 and £827, and 2% on the remaining amount (£73). Her employer pays 13.8% on her entire wage.

  2. Self-employed Contributions: John, a self-employed consultant, earns £50,000 per year. He pays 9% NIC on earnings between £8060 and £43,000, and 2% NIC on earnings above £43,000.

  3. Voluntary Contributions: Mary is unemployed but wants to maintain eligibility for state benefits. She pays £14.10 per week as a voluntary contribution (Class 3).

Frequently Asked Questions

What is National Insurance?

National Insurance is a system of contributions paid by workers and employers towards the cost of certain state benefits.

What benefits are covered by NICs?

NICs finance a range of benefits, including retirement pensions, jobseeker’s allowance, widow’s benefits, incapacity benefit, and maternity benefits.

Who needs to pay NICs?

Employees, employers, and the self-employed are required to contribute, although the amount and type of contribution vary.

How are NICs for self-employed individuals different?

Self-employed individuals pay Class 4 NICs at a different rate and according to different income bands compared to employees.

What are voluntary contributions?

Class 3 NICs, or voluntary contributions, allow individuals to maintain their contribution records even if they aren’t earning enough for mandatory contributions.

  • Income Tax: Tax levied directly on personal income.
  • PAYE (Pay As You Earn): A method of paying income tax and NICs where taxes are deducted from your salary by your employer.
  • Pension Credit: An income-related benefit paid to those over the retirement age.

Online References

Suggested Books for Further Studies

  • “UK Taxation: A Simplified Guide for Students” by Mark Hunt.
  • “Tolley’s National Insurance Contributions 2021-22 Main Annual” by Neil Cherry and Sarah Bradford.
  • “Simon’s Taxes” by Matthew Hutton, 2020.
  • “Taxation: Policy and Practice” by Andy Lymer and Lynne Oats.

Accounting Basics: “National Insurance Contributions (NICs)” Fundamentals Quiz

### What percentage of earnings do employees pay on weekly earnings between £155 and £827 (2016-17 figures)? - [x] 12% - [ ] 10% - [ ] 15% - [ ] 8% > **Explanation:** Employees pay 12% on weekly earnings between £155 and £827 (2016-17 figures). ### What class of National Insurance contributions was abolished for the self-employed? - [ ] Class 1 - [ ] Class 3 - [ ] Class 1A - [x] Class 2 > **Explanation:** Class 2 NICs, which were flat-rate contributions paid by the self-employed, have been abolished. ### What is the rate for Class 4 contributions on income above £43,000 per year? - [ ] 9% - [x] 2% - [ ] 12% - [ ] 15% > **Explanation:** The self-employed pay Class 4 NICs at a rate of 2% on income above £43,000 per year. ### Which class of National Insurance contributions is voluntary? - [ ] Class 1 - [ ] Class 2 - [x] Class 3 - [ ] Class 4 > **Explanation:** Class 3 NICs are voluntary contributions paid by those who wish to maintain their contribution record. ### What rate do employers pay for Class 1 secondary contributions? - [ ] 12.5% - [ ] 11% - [ ] 15% - [x] 13.8% > **Explanation:** Employers pay Class 1 secondary contributions at a standard rate of 13.8%. ### What type of expenses qualify for Class 1A contributions? - [ ] Personal expenses - [x] Benefits in kind like company cars - [ ] Housing expenses - [ ] Regular salary > **Explanation:** Class 1A NICs are payable on benefits in kind such as company cars provided for private as well as business use. ### Who primarily makes Class 1 primary contributions? - [x] Employees - [ ] Employers - [ ] Self-employed - [ ] Contractors > **Explanation:** Class 1 primary contributions are paid by employees on their earnings. ### What did Class 2 contributions traditionally represent? - [ ] Voluntary contributions for high earners - [x] Flat-rate contributions by the self-employed - [ ] Additional employee contributions - [ ] One-time contributions for retirees > **Explanation:** Class 2 NICs were flat-rate contributions paid by the self-employed before being abolished. ### What is the purpose of National Insurance contributions? - [ ] Funding public works - [ ] Paying off national debt - [x] Financing social security benefits - [ ] Providing subsidies to businesses > **Explanation:** National Insurance contributions are used to fund a range of social security benefits such as pensions, jobseeker’s allowance, and maternity benefits. ### If an employee earns £1000 per week, how much is paid at the rate of 2%? - [ ] £100 - [ ] £155 - [x] £73 - [ ] £200 > **Explanation:** Earnings above £827 are subject to a 2% NIC; therefore, on £1000 weekly earnings, £1000 - £827 = £173. 2% of £173 equals £3.46.

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Tuesday, August 6, 2024

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