COURSE: ACCA – TAXATION (TX)
Lecture Topic: National Insurance Contributions (NICs)
The five (5) classes of national insurance contribution (NICs) that are relevant to the TX syllabus are:
(a) Class 1 Employee (also called Class 1 Primary) - paid by employees
(b) Class 1 Employer (also called Class 1 Secondary) - paid by employers
(c) Class 1A - paid by employers
(d) Class 2 - paid by the self employed
(e) Class 4 - paid by the self employed
These NICs are calculated using the rates and limits as per the following table (given in the exam):
National Insurance Rates
Class 1 employee £1 - £12,570 per year Nil
£12,571 - £50,270 per year 13.25%
£50,271 and above per year 3.25%
Class 1 employer £1 - £9,100 per year Nil
£9,101 and above per year 15.05%
Employment Allowance £5,000
Class 1A 15.05%
Class 2 £3.15 per week
Lower Profits Limit £12,570
Class 4 £1 - £12,570 per year Nil
£12,571 - £50,270 per year 10.25%
£50,271 and above per year 3.25%
Summary of NICs
Class of NIC Who pays it What figure is used to calculate it
The employee’s cash earnings from
employment plus the value of non-cash
Class 1 Employee (Class 1 Primary) Employee vouchers and mileage allowance in
excess of 45p per mile.
The Employer pays it for each
individual employee. (Therefore, it must
Class 1 Employer (Class 1 Secondary) be calculated separately for each Same as above.
employee)
The Employer pays it for each The taxable benefits of the employee,
individual employee. (Therefore, it must excluding non-cash vouchers and
Class 1 A be calculated separately for each mileage in excess of 45p per mile.
employee)
Class 2 Paid by self-employed persons for Based on a flat weekly rate of £3.15 per
themselves. week.
Class 4 Paid by self-employed persons for The tax adjusted trading profit.
themselves.
1
1. NIC’s for employees
Class 1 NIC is paid in respect of an employee’s earnings. The primary contribution is paid by the employee, and a secondary
contribution is paid by the employer. Both Class 1 Primary and Class 1 Secondary contributions are collected under the PAYE
system.
Class 1 Primary NIC (Class I Employee)
o The rate of employee’s Class 1 NIC is 13.25% on earnings between £12,570 and £50,270 per year, and 3.25% on
earnings over £50,270 per year.
o Earnings include:
- wages, salary, overtime, commission, bonus, tips and gratuities
- non-cash vouchers (other than non-taxable vouchers and child care vouchers up to the exempt amount)
- mileage allowance in excess of 45p per mile (irrespective of total mileage)
o Benefits (other than those listed above) are disregarded in calculating gross earnings for this purpose.
Class 1 Secondary NIC (Class 1 Employer)
o Employers pay Class 1 secondary contributions of 15.05% on earnings (of each employee) exceeding £9,100 a year.
o An annual employment allowance is available to all businesses which they can use to reduce the amount of
employer’s class 1 NIC that is paid to HMRC. The allowance is £5,000 per year per employer and does not affect
the amount of class 1A or employee class 1 NIC that is payable. If total employer’s class 1 NIC is £5,000 or less, then
the liability will be nil. The employment allowance is not available to companies where a director is the sole employee
or where employers’ contributions are £100,000 or more for the previous tax year.
Earnings period
o Class 1 NIC is normally calculated in relation to an earnings period (e.g. weekly, monthly etc.). The thresholds used to
determine the rate of NIC payable are divided into weekly or monthly thresholds.
o In the exam the Class 1 NIC limits are shown on an annual basis rather than a weekly basis. Calculations should
therefore be done on annual basis unless you are told otherwise.
Class 1A NIC
o Employers must pay Class 1A NIC at 15.05% in respect of most taxable benefits provided to employees.
o Class 1A does not include items already caught under Class 1, such as non-cash vouchers.
o Class 1A contributions are collected annually in arrears, and are due by 19 July following the tax year. If the payment
is made electronically, payment must reach HMRC’s bank account no later than 22 July following the end of the tax
year.
2
2. NICs for the self employed
Self-employed persons pay Class 2 and Class 4 NICs.
Class 2 NIC
o Class 2 NICs are payable at a weekly flat rate. For 2022-23 the rate is £3.15 a week.
o A self-employed person does not have to pay class 2 NIC if trading profits are less than £12,570.
o Class 2 NIC must be paid over to HMRC by 31 January following the tax year.
Class 4 NIC
o The self-employed also pay Class 4 NICs based on the level of the individual’s taxable trading profits.
o The rate of Class 4 NIC is 10.25% on profits between £12,570 and £50,270. An additional 3.25% is payable on profits
over £50,270.
o Class 4 NICs are paid at the same time as the associated income tax liability.
.
Questions
1.
Simon is employed at an annual salary of £60,000. In 2022-23 he also received a car benefit valued at £10,000.
Calculate the NICs payable by both employee and employer.
2.
Freddy, a sole trader, has trading profits of £60,000 in 2022-23.
Calculate the NICs payable by Freddy.
3.
Mrs. Goose is a sole trader. Her taxable trading profit for 2022-23 was £65,000.
Jack and Jill are employed by Mrs. Goose. Their gross wages were £30,000 and £55,000 respectively.
During 2022-23, Jill received an accommodation benefit valued at £5,000 as a result of her employment.
Calculate the NICs payable by Mrs. Goose, Jack and Jill for 2022-23.
