Definition
National Insurance Contributions (NICs) are mandatory payments made by employees and employers in the UK that contribute to the National Insurance Fund. This fund is used to finance a range of social security benefits, including retirement pensions, jobseeker’s allowance, widow’s benefits, incapacity benefit, and maternity benefits. There are six different classes of NICs, each applicable based on the type of earned income a person receives.
Classes of National Insurance Contributions:
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Class 1 Contributions: Paid by employees and employers. Employees (primary contributions) pay 12% on weekly earnings between £155 and £827, and 2% on weekly earnings above that threshold. Employers (secondary contributions) pay a standard rate of 13.8%.
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Class 2 Contributions: Previously a flat-rate contribution paid by the self-employed, now abolished.
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Class 3 Contributions: Voluntary contributions at a flat rate (£14.10 per week in 2016-17) paid by those who wish to maintain their contribution record.
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Class 4 Contributions: Paid by the self-employed at a rate of 9% on income between £8060 and £43,000 per year, and 2% on income above that.
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Class 1A Contributions: Paid by employers on benefits in kind provided to employees, such as company cars. The current rate is 13.8%.
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Class 1B Contributions: Paid by employers on any items included in a PAYE settlement agreement with HM Revenue and Customs.
Examples
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Employee and Employer Contributions: Jane earns £900 per week. She pays 12% on her earnings between £155 and £827, and 2% on the remaining amount (£73). Her employer pays 13.8% on her entire wage.
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Self-employed Contributions: John, a self-employed consultant, earns £50,000 per year. He pays 9% NIC on earnings between £8060 and £43,000, and 2% NIC on earnings above £43,000.
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Voluntary Contributions: Mary is unemployed but wants to maintain eligibility for state benefits. She pays £14.10 per week as a voluntary contribution (Class 3).
Frequently Asked Questions
What is National Insurance?
National Insurance is a system of contributions paid by workers and employers towards the cost of certain state benefits.
What benefits are covered by NICs?
NICs finance a range of benefits, including retirement pensions, jobseeker’s allowance, widow’s benefits, incapacity benefit, and maternity benefits.
Who needs to pay NICs?
Employees, employers, and the self-employed are required to contribute, although the amount and type of contribution vary.
How are NICs for self-employed individuals different?
Self-employed individuals pay Class 4 NICs at a different rate and according to different income bands compared to employees.
What are voluntary contributions?
Class 3 NICs, or voluntary contributions, allow individuals to maintain their contribution records even if they aren’t earning enough for mandatory contributions.
Related Terms
- Income Tax: Tax levied directly on personal income.
- PAYE (Pay As You Earn): A method of paying income tax and NICs where taxes are deducted from your salary by your employer.
- Pension Credit: An income-related benefit paid to those over the retirement age.
Online References
Suggested Books for Further Studies
- “UK Taxation: A Simplified Guide for Students” by Mark Hunt.
- “Tolley’s National Insurance Contributions 2021-22 Main Annual” by Neil Cherry and Sarah Bradford.
- “Simon’s Taxes” by Matthew Hutton, 2020.
- “Taxation: Policy and Practice” by Andy Lymer and Lynne Oats.
Accounting Basics: “National Insurance Contributions (NICs)” Fundamentals Quiz
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