Overview of NICs(1)
4.The National Insurance Scheme was first established in 1911 and expanded in the late 1940s to provide funds for a more comprehensive and inclusive range of contributory benefits and to provide assistance with the funding for a new National Health Service.
5.Briefly, the scheme consists of a number of benefits financed by contributions payable by earners, employers and others. The money is collected via NICs. Employees pay NICs on their earnings, employers pay NICs on the earnings they pay to their employees and the self-employed pay NICs on their profits and gains.
6.The scheme defines the category of a worker as either an employed earner or a self-employed earner. An employed earner is a person who is gainfully employed in Great Britain or Northern Ireland either under a contract of service, or in an office (including elective office) with general earnings. A self-employed earner is a person who is gainfully employed in Great Britain or Northern Ireland otherwise than as an employed earner. Provision is made within the scheme to allow those who are not compulsorily covered to protect their entitlement to the state retirement pension by means of voluntary NICs payments.
7.NICs are divided into six classes.
Class 1 contributions, which are paid by both employees and employers on the employee’s earnings – the employee’s share is known as the primary contribution, the employer’s as the secondary contribution. Class 1 contributions are payable on all gross earnings including commissions, overtime and bonuses, on readily convertible assets given to employees and on employees’ liabilities paid by employers. Primary contributions are payable at 11% of earnings above £110 up to £844 per week (£5,715 to £43,875 per year) and 1% of all earnings above this limit. Secondary contributions are payable at 12.8% of all earnings above £110 per week. There are arrangements for reducing the rates of both primary and secondary contributions where the employee has contracted out of the State Second Pension. Class 1 contributions are normally collected monthly by HMRC along with PAYE income tax.
Class 1A contributions are payable annually by employers on most taxable benefits in kind. They are payable by employers only. Class 1A contributions are payable at a rate of 12.8%.
Class 1B contributions are payable annually by employers on items which are dealt with under a PAYE Settlement Agreement (PSA) for income tax. Class 1B contributions are payable at a rate of 12.8% on the value of the items included in the PSA and on the total tax payable by the employer under the PSA.
Class 2 contributions are paid by the self-employed at a flat rate of £2.40 per week – a self-employed person can apply to be exempted from liability where earnings are below £5,075 per year. Class 2 contributions are paid either monthly or quarterly.
Class 3 contributions are paid on a voluntary basis, at a flat rate of £12.05 per week, by people who fall outside the scope of Class 1 and Class 2 contributions.
Class 4 contributions are paid annually by the self-employed on profits that are immediately derived from a trade, profession or vocation and which are chargeable to income tax. Class 4 NICs are payable at a rate of 8% on profits between £5,715 and £43,875 and 1% of profits above £43,875.
Amounts and rates are for the 2010-11 tax year.
