Search Legislation

Advanced Search

National Insurance Contributions Act 2022

Contents

Policy background

Overview of the structure of NICs

  1. NICs are currently divided into six classes:
    • Class 1 contributions are paid by both employees (primary) and employers (secondary) on the employee’s earnings. Contributions are payable by employees at 12% between the Primary Threshold and the Upper Earnings Limit, and 2% above that, for the 2021-22 tax year. Employers pay 13.8% on earnings above the Secondary Threshold.
    • Class 1A contributions are payable, by employers only, on most taxable benefits in kind and termination awards. Class 1A contributions are payable at a rate of 13.8% for the 2021-22 tax year.
    • Class 1B contributions are payable annually by employers on items under a PAYE Settlement Agreement (PSA) for income tax. Class 1B contributions are payable at a rate of 13.8% for the 2021-22 tax year on the value of 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 £3.05 per week for the 2021-22 tax year. Class 2 NICs are mostly paid through Self Assessment. A person with profits from self-employment above £6,515 is required to pay Class 2 NICs. Payment is voluntary where profits are below this level.
    • Class 3 contributions are voluntarily payable at a flat weekly rate of £15.40 per week for the 2021-22 tax year by people who are not otherwise liable to pay Class 1 or Class 2 NICs to protect their entitlement to State Pension.
    • Class 4 contributions are paid annually by the self-employed on profits chargeable to tax as trading income. Class 4 NICs are payable at a rate of 9% on profits between a lower and upper profits threshold, and 2% on profits above the upper profits threshold, for the 2021-22 tax year.

Freeports

  1. Employers are liable to pay secondary Class 1 NICs in respect of the earnings of their employees above the Secondary Threshold (currently set at £170 per a week) except in certain cases where reliefs apply, for example, where they employ employees under 21 and apprentices under 25 years of age. The current rate of secondary Class 1 NICs is 13.8%.
  2. The Act introduces a new zero-rate of secondary Class 1 NICs relief for Freeport employers. Sections 1 to 4 deal with Freeports in Great Britain (GB) and section 5 provides for Freeports in Northern Ireland (NI). This measure is part of the government’s wider Freeport programme, and is intended to reduce the cost of hiring employees in a Freeport tax site and to incentivise employment within Freeports. The Government’s intention is that freeports will be national hubs for global trade and investment across the UK. They also aim to promote regeneration and job creation as part of the Government’s policy to level up communities.
  3. In GB, this relief provides for a zero-rate of secondary Class 1 NICs on the earnings of Freeport employees for 36 months starting from the first day of employment, up to an Upper Secondary Threshold which will be set at £25,000.
  4. A Freeport employer is a business which is operating from physical premises in a Freeport Tax Site. The Finance Act 2021 provides a power for the Treasury to designate Freeport tax sites in Great Britain by statutory instrument subject to negative procedure. NI Freeports and Freeport Tax Sites will be defined in a future Finance Bill. The Act intends that employers based in these designated sites will become eligible for the relief in respect of qualifying Freeport employees.
  5. A Freeport employee is an employed earner of a Freeport employer who spends 60% or more of their employed time in a single Freeport Tax Site in which their employer has business premises.
  6. This relief is available to Freeport employers in respect of new employments from 6 April 2022. In order to qualify for this relief, the Freeport employment must begin on or after 6 April 2022 and no later than 5 April 2026. If the government decides not to continue the relief after April 2026 (following a review of its effectiveness), new claims will not be permitted. Employments that start before 6 April 2026 will qualify for the relief for the full 36 months, or until termination of their employment, whichever is sooner. Freeport employers are able to claim this relief by reporting through HMRC’s Real Time Information system.
  7. Section 5 provides a power to make secondary legislation providing for an employer NICs relief in NI Freeports. For this reason, these Explanatory Notes are limited to describing the sections relating to the effect of this NICs change in GB.

Veterans

  1. The Act introduces a new measure that would meet a government manifesto commitment to a NICs holiday for veterans by introducing a zero-rate of secondary Class 1 NICs relief for employers of armed forces veterans on their earnings for 12 months starting with the first day of a veteran’s first civilian employment after leaving the regular armed forces. Subsequent and concurrent employers can benefit from this relief during this period. The aim of this measure is to reduce the cost of employing a veteran and encourage employment of veterans, to support veterans in transitioning to civilian life. The measure was subject to consultation between 21 July 2020 and 5 October 2020.
  2. To qualify a veteran must have completed at least one day of basic training in the armed forces. This relief is available to employers from 6 April 2021 to 5 April 2024. The government will review this relief in 2023 and will have the power to extend this relief beyond the 2023-24 tax year.
  3. From 6 April 2022 employers are able to claim this relief through HMRC’s Real Time Information system. From 6 April 2021 to 5 April 2022, transitional arrangements will be in place so that employers can claim the relief retrospectively for that period from 6 April 2022 onwards.

Self-isolation support scheme payments

  1. Lump sum payments of £500 are available to be claimed under separate schemes in England, Wales and Scotland for people who have been asked to self-isolate by the relevant authority who cannot work from home and will suffer financial consequences as a result (subject to the eligibility criteria of the relevant scheme). Payments are intended to provide additional financial support to those on low incomes so they can self-isolate and help stop the spread of coronavirus. The English scheme was piloted on a limited basis from 1 September 2020, then rolled out nationally from 28 September 2020. The Scottish and Welsh schemes began in October 2020.
  2. The schemes are administered by local authorities. Payments made under the schemes to employed people are earnings and liable to employee and employer Class 1 NICs. This means that local authorities would have to account for and potentially deduct the value of employee NICs from any payments made. Additionally, the employer would have to deduct Class 1 NICs on the gross value of the payment received by their employees under the schemes. This would result in administrative and cost burdens on local authorities and on employers. The Chancellor of the Exchequer therefore decided to make secondary legislation to ensure that these payments are not subject to Class 1 (employee and employer) and Class 1A (employer) NICs. The Class 1 and Class 1A NICs exemption in respect of employed people was achieved in regulations (S.I. 2020/1065 and 2020/1532) by exercise of the powers conferred by sections 3(2) and (3) and 10(9)(a) of the Social Security Contributions and Benefits Act 1992, using the existing power to disregard certain payments when calculating earnings liable to Class 1 NICs (for England in October 2020 and for Scotland and Wales in January 2021).
  3. The Act ensures equal treatment for the self-employed by exempting payments from Class 2 and Class 4 NICs. Payments made under the self-isolation support schemes generally fall to be taxed as trading income in respect of the self-employed and are taxed under Chapter 2, Part 2 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 05). Class 4 NICs are payable on profits chargeable to income tax under Chapter 2, Part 2 ITTOIA 05 in the same manner as any income tax is chargeable in respect of those profits. Class 2 NICs are payable in respect of profits that are chargeable to Class 4 NICs.

Disclosure of contributions avoidance arrangements

  1. Disclosure of tax avoidance schemes (DOTAS) was introduced in 2004 and seeks to provide HMRC with early information about new tax and NICs avoidance schemes, how they work and those who use them. It creates obligations on those who promote or enable tax avoidance to disclose details of the avoidance schemes they are promoting.
  2. The government announced in its Budget 2020 a package of measures to target those who promote and market tax avoidance schemes. A government consultation seeking views on proposals to strengthen the sanctions against promoters of tax avoidance, including draft legislation, was launched on 21 July 2020 and closed on 15 September 2020. Respondents were generally supportive of the package and the government has introduced legislation in the Finance Act 2021.
  3. These DOTAS changes ensure that HMRC can act where promoters fail to provide information on their avoidance schemes and make taxpayers aware at an earlier stage where it suspects a tax avoidance scheme is being sold. The NICs Act replicates what is in the Finance Act 2021 in that it provides a mechanism for ensuring there is transparency for people who are involved in NICs avoidance schemes, and to change the behaviours of those involved in promoting such schemes.
  4. The existing legal requirements to disclose schemes aiming to avoid NICs are imposed by regulations. These regulations are made under section 132A of the Social Security Administration Act 1992.

Back to top