Guide to National Insurance

If you are an employee, or an employer, then you will have to pay National Insurance contributions (NICs), in addition to tax.

NICs are payable to HM Revenue & Customs (HMRC), and fund various state benefits, such as the state pension and various welfare schemes. There are various classes of NICs, and you will pay at least one these depending on your position in the workforce.

Types of National Insurance contributions

Class 1 – Employees

Primary contributions are paid by the employee pay at a rate of one percent of their gross earnings, up to and including the upper earnings limit (UEL), and at a reduced rate for earnings over the UEL.

Class 1 – Employers

Employers pay secondary contributions on their employees’ gross earnings, however there is no UEL for employer’s contributions.

Class 1A

Employers pay these annually on any employee benefits, such as a company car or private medical insurance.

Class 1B

Employers who have entered into PAYE agreement with HMRC to cover expense payments or benefits pay this

Class 2

A flat rate paid monthly or quarterly by most self-employed individuals, unless earnings are below a certain limit.

Class 3

Voluntary contributions, paid by those who want to top up their NICs in order to qualify for certain benefits.

Class 4

Self-employed individuals whose annual profits are over a certain amount may have to pay this.

National Insurance contributions for sole-traders and the self employed

The majority of sole traders pay class 2 contributions, and some will pay class 4 NICs in addition.

If you earn more than £5,075 p/a as a sole trader, then you will need to pay Class 2 NICs. Class 2 contributions are currently set at a flat rate of £2.40 per week, and are deducted from your gross earnings either monthly or quarterly.

You will be exempt from making class 2 contributions if:

- you are under 16

- you are over 60 (females) or over 65 (males)

- you are a married woman or widow (you will be entitled to a reduced rate of class 1 contributions)

- your yearly earnings are less than £5,075 (you will need to apply for a Small Earnings Exception Certificate).

If you are self-employed in your spare time, then you must pay Class 2 NICs, even if you are also paying National Insurance as an employee (Class 1).

If you make annual profits above a certain level (set at £5,715 for 2009), then you will be entitled to pay Class 4 NICs in addition to your Class 2 payments. Your Class 4 contributions will be calculated as part of your yearly self-assessment tax return. The rate for class 4 NICs is currently set at 8 per cent for all earnings between £5,715 and £43,875 per annum, plus 1 percent on any profits over that amount.

HMRC Guide to NI for Self-Employed

NI for Employees, Employers and Company Directors

Employees pay Class 1 contributions, at a rate of 11 per cent (unless you are a married or widowed woman, paying the reduced rate of 4.5 per cent) on earnings over £110 and less than £844 per week, and 1 per cent above £844 per week.

Employers pay Class 1 contributions at a rate of 12.8% of an employee’s total earnings over £110 per week, and there is no upper earning limit.

If you are the director of a limited company then you will be classed as an ‘office holder’ for tax purposes, and will be need to pay Class 1 contributions as if you were an employee. The limited company will also need to make Class 1 contributions as your employer.

Unlike employee’s Class 1 contributions, director contributions are calculated on an annual cumulative basis, rather than their weekly or monthly salaries, so must be re-calculated every time a director is paid.

HMRC Guide to NI for Company Directors

HMRC Guide to NI for Employers

Voluntary Contributions – why should you make them?

If your National Insurance Contributions are too low, then you could receive a reduced state pension, and miss out on other state benefits such as the widowed parent’s allowance, bereavement payment and bereavement allowance. You can top up your NICs by making voluntary Class 3 contributions.

Class 3 contributions are payable at a flat weekly rate, either by monthly direct debit or quarterly bills.

If you are unsure as to whether or not you would benefit from making Class 3 contributions, you can apply for a state pension forecast on the Pension Service Website.

HMRC Business Payment Support Service

If you’re worried about being able to meet tax, National Insurance, VAT or other payments owed to HM Revenue & Customs (HMRC), or you anticipate that payments coming due will cause you problems, you can call their Business Payment Support Line on Tel 0845 302 1435.

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