For those of you that are owners of a business, or self-employed, there are a number of things to understand about National Insurance contributions (NICs), how to calculate it and how to pay. Employees pay NICs on their earnings, whilst employers pay contributions for each employee and also collect and pay the contributions of their employees’.
National Insurance contributions ensure that the earner has access to a range of benefits, including the state pension upon retirement age. It is vital that business owners understand the importance of NICs and the processes involved.
There are five classes of National Insurance contributions to be aware of, but employers need only worry about Class 1, 1A, and sometimes 1B. Self-employed individuals pay Class 2 and 4 NICs, with Class 3 being voluntary contributions for those who don’t currently pay NICs or are not entitled to National Insurance credits.
Class 1 NICs are paid for most employees of a company, including company directors, workers on a short-term contract and casual and part-time workers. Class 1 NICs are paid at a flat rate of 13.8%, with no upper limit on the amount an employer can pay.
There are though a number of exceptions for employers in terms of Class 1 NICs. They do not need to make contributions for the following employees:
• Individuals under the age of 16 years
• Individuals earning up to £866 per week, and under the age of 21 years
• Individuals paid £157 per week or less
• Apprentices earning up to £866 per week, and under the age of 25 years
Class 1A NICs are paid at the same 13.8% flat rate on most benefits that are provided to employees, including company cars and fuel for private use, paid on the same ‘cash equivalent’ as employee’s tax liability. Class 1B NICs can be paid for any expenses and benefits covered by a PAYE settlement agreement through a single annual payment to HMRC.
Class 2 NICs are paid at £2.85 per week and are due to be abolished from April 2018. Anyone earning under £6,025 per year is exempt from paying Class 2 NICs. Class 4 NICs are paid at 9% on profits between £8,164 and £45,000, with 2% added to any profits above this upper limit.
Payments for both Class 2 and Class 4 National Insurance contributions are taken by the HMRC at the same time as income tax is collected.
Making NIC Payments as an Employer
In order to make payment on NICs you must first work it out as a percentage of gross pay, which is the pay amount before any PAYE and pension deductions have taken place. This gross figure includes wages, any bonus payments that have been given, fees, overtime payments, allowances such as petrol and any personal expenses, such as phone bills.
The period of earnings covers the time since the last payday, and tax and NICs are deducted every single time you pay an employee. HMRC are paid each month by businesses, with payments being collected quarterly if the average monthly total is below £1,500 for the collection of PAYE, NIC and student loan payments. Penalty fees are added to any payments sent after the deadline of the 22nd of each working month (19th of the month for postal payments).
Payroll Records and other HMRC Information
All payroll information has to be reported to HMRC through its online platform, including PAYE reports using the HMRC PAYE tools or compatible software platforms. As an alternative to this, you can also use an accountant or payroll bureau to perform these tasks. Records for all staff must be kept, even if an individual works a few hours and earns very little in comparison to the rest of the company. Details needed include gross pay, PAYE, NICs deducted and statutory pay, with a payroll record for each individual employed created at the start of each tax year to record individual benefits and expenses received. Every time an employee is paid you must send a full payment submission and Employer Payment Summary in cases where reductions are reported.
Any new employees should provide his or her P45 and National Insurance number in order for you to check the employment situation for that individual. At the end of each tax year, their employer, prior to 31st May, should provide employees with a P60 form.
Reductions can be made to contributions through claiming employment allowance of up to £3,000 through an application when your Employer Payment Summary is submitted. If you do not claim the full total it can be claimed against other PAYE taxes owed by the company.
Other methods involved a pay structure for employees that ensure they earn just below the NI threshold, though this is only an option within certain industries and national minimum wage MUST be paid at all times. An employer can also put in place a status of ‘employee shareholder’ that provides shares in the company in exchange for certain employment rights. The first £2,000 is generally exempt from income tax and NI payments.