11.1
What the NIC system is
National
Insurance is a statutory deduction which must be taken per week or month
(depending on pay frequency) from every single employee's wages by law.
Everyone is aware
of National Insurance but not everyone knows what it is for, what it entitles
you to, or why it is paid. In this module, we will answer those questions, as
well as explain how to deduct National Insurance from an employee's wage, using
your payroll system software.
National Insurance Contributions (NIC)
NIC is what an employee pays out of their wages every pay period as
a statutory deduction, alongside income tax, student loan repayments and
workplace pensions. National Insurance is required to be deducted by law,
although as you will see by reading this module, there are terms and conditions
to take into account which may change from person to person, depending on their
personal circumstances.
National Insurance payments entitle the employee to certain state
benefits, such as state pension and maternity pay. As an employee, it's
important to try and avoid gaps in a National Insurance record, because this
could affect entitlement to those benefits. Reduced National Insurance
contributions throughout a person's working life may mean reduced state pension
upon retirement.
The amount you need to earn before you start paying NICs changes every
year. To see the most up-to-date earning thresholds and a general overview of
the NIC system please go to: www.gov.uk/national-insurance
If an individual is earning slightly less than the
earning threshold, then contributions are classed as 'NI credits' to qualify
for some basic NI benefits, to offer protection to that person's National
Insurance record and prevent gaps. Gaps can mean reduced benefits in later
life.
In order to pay National Insurance, a unique
National Insurance number must be allocated and these are issued to everyone in
the UK a few months prior to reaching the age of 16 years. HMRC should be
contacted if someone between 16 and 19 years of age hasn't received a National
Insurance number. Immigrants and foreign students can also apply for their own
National Insurance number, as long as they have the legal right to study or
work in the UK. National Insurance numbers for foreign nationals are normally
issued with their residence visas but if they don't have one then they can
apply directly to HMRC.
11.2 Why Do We Pay National Insurance?
Paying National Insurance entitles an individual to
certain benefits when living and working in the UK.
Mainstream
employees who pay their National Insurance through the PAYE system (Pay as You
Earn) will pay Class 1 National Insurance, and this is what you will deduct
from your employee's pay at the end of the week or month, calculated and deducted
by your payroll software, and then reported to HMRC via the full payment
submission.
These benefits are:
·
-Basic State Pension
·
-Additional State Pension
·
-New State Pension
·
-New Style Job Seeker's Allowance
·
-Contribution-based Employment and Support Allowance
·
-Maternity Allowance
·
Bereavement Support Payment
· These
benefits are important financially, both in life now and in the future, after
retirement. Avoidance of gaps in an individual's National Insurance record is
imperative, which explains why this is a statutory deduction that must be taken
from your employees' pay at the end of every pay period, without fail. Put
simply, National Insurance is made up of contributions made throughout an
employee's working life, which adds up to allow benefits, both at retirement
age in the form of a state pension, and also throughout their working life, for
example, maternity pay eligibility. Amounts are deducted from the employee's
wages by the employer, and the amount deducted depends on employment type, as
well as their National Insurance class.
11.3 Different Types and Rates of National
Insurance and What They Mean for Your Employee
Whilst you will probably only deal with Class 1
National Insurance contributions when it comes to making deductions from your
employees' wages, it is important to know about the other classes available, in
order to have a thorough overview of the National Insurance Contributions
system as a whole.
The type of
National Insurance and the amount paid depends on employment status, how much
is earned, and whether the individual has any gaps in their current National
Insurance record. The earnings threshold for both self-employed workers
and those in employment changes every year. The current thresholds can be
found here. The amount of National Insurance
paid is calculated as a percentage of an employee's salary. Current figures are
explained here.
NI Classes
Class 1: This is paid from employment, deducted by the employer
through the PAYE system, and is continued to be paid whilst in employment until
the individual reaches state pension age. The amount an employee pays is dependent
on their income and the current rates for the relevant tax year (see link
above).
Employees will pay less Class 1 National Insurance contributions in
certain circumstances, such as some married women or widows with a 'certificate
of election', or if they are deferring payment of National Insurance
contributions because they have another job on top of the one you are dealing
with.It is important to know about any changes in circumstances, so the correct
amount of National Insurance can be deducted from gross pay.
Class 1A/1B: Employers are required to pay these
National Insurance contributions directly on expenses and benefits relating to
their employees.
Class 2: This class of contributions relates
to self-employed individuals who are declaring their earnings on a
self-assessment form at the end of every tax year. If earning under the
earnings threshold, individuals do not need to pay these contributions;
however, this must be reported to HMRC in order to obtain a certificate to
state this. In these circumstances, a self-employed individual can choose to
pay voluntary contributions, to top up their National Insurance record.
Individuals in this category stop paying contributions when they reach state
pension age.
Class 3: Contributions in this class are
voluntary and are generally paid by those who wish to fill in gaps in their
National Insurance record from the past, or to avoid gaps due to their personal
circumstances. Class 3A Contributions in this class are also voluntary and are
used to top-up pension contributions. This can be with a single lump sum for
those individuals who are due to retire from employment.
Class 4: Self-employed individuals who are
earning a profit above a certain level will pay class 4 National Insurance
contributions. These will be reported to HMRC and calculated through the
self-assessment form, completed at the end of the current tax year. Individuals
in this category stop paying contributions from 6 April of the year after they
reach state pension age.
Whilst in the general weekly or
monthly run of your payroll system, as an employer you will probably only deal
with Class 1 National Insurance Contributions overall, it is important to
understand that there are different class categories.
11.4 Employer's National Insurance Contributions -
What Are They?
An employer must pay National Insurance
contributions on their employees' earnings, on top of collecting the individual
contributions through the PAYE system, reported through payroll software to
HMRC.
As with the
different National Insurance classes we discussed in our last section, there
are different types of employer National Insurance too, but generally speaking,
you will only deal with Employer's National Insurance Class 1. How much you pay
depends on your employees' earnings, their age, etc.
The current rates for Employer National Insurance
contributions can be found here (look for the 'Employer National Insurance
rates' heading): www.gov.uk/national-insurance-rates-letters
As with Employee National Insurance rates, the Employer rates may change
year on year, so staying up to date with current figures is imperative for a
business. HMRC will not take ignorance of the facts as an excuse for incorrect
deduction reporting through the full payment submission of employee wages.
11.5 How to Deduct National Insurance From an Employee's Wages
Calculations and deductions of National Insurance
Class 1 contributions from an employee's wage are done by your payroll
software.
Again, it is
important to invest in high-quality software for accurate deductions, which are
communicated to HMRC through your regular full payment submission. Some
employees' circumstances will be different to others, and your software needs
to be able to easily accommodate this. It is vitally important to communicate
any changes in circumstances to HMRC, through your full payment submission, to
ensure correct amounts are deducted.
As we touched upon in the first few modules of this
course, if you outsource your payroll responsibilities, such as to an
accountant or book-keeper, any changes in circumstances need to be communicated
in a timely and safe manner, to ensure the correct information is reported on
your full payment submission to HMRC.
A late communication of a change in working pattern
or circumstances, in general, can result in too much or too little National
Insurance being taken from an employee's pay, and this can have time-consuming
and costly consequences to both the employer and employee.
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