Class 1 national insurance is due to HMRC if you are in employed work and are earning a salary at a certain level. Class 2 national insurance will be abolished in April 2018 leaving only a new potentially reformed Class 4 national insurance for self-employed workers. The Class 4 NI could be changed to make it more like Class 1 NI with entitlement to state benefits that are currently available by paying Class 2 NI. So, for that reason, I will look at Class 1 NI in more detail here.
What is national insurance?
National insurance is not a tax. National insurance is collected in order to qualify for certain state benefits. Some of the state benefits include statutory maternity/paternity pay, state pension and job seekers allowance. You need to pay national insurance, if you are 16 years or older and earn:
more than £8,164 if you are employed or
more than £6,025 if you are self-employed
How many classes of national insurance are there?
There are four main types of national insurance:
· Class 1 – which is paid if you are employed – see below
· Class 1A/B – which is paid on employee benefits and expenses – see below
· Class 2 – which is paid if you are self-employed and earn more than £6.025– see here
· Class 3 – which is a voluntary payment and can be done if there are gaps in your contribution – see here
· Class 4 – which is paid if you are self-employed and have profits above £8,164.
Class 1 National Insurance
As an employee, you may potentially have to pay Class 1 NIC. Your employer will make the payment to HMRC on your behalf along with their employers national insurance. Your net pay will, therefore be after the national insurance has been deducted.
Your class 1 national insurance is calculated on gross earnings (before tax or pension deductions) above an ‘earnings threshold’. For 2017-18, the National Insurance threshold is £8,164 a year.
If your earnings are below the earnings threshold, you pay no national insurance contributions.
If you earn above the threshold, you pay 12% of your earnings between £8,164 and £45,000. (Employers National insurance is at 13.8%).
If you earn above £45,000 a year, you pay National Insurance at 2% on income above £45,000.
Class 1A National Insurance
This is calculated on any employee expenses or benefits they receive from the company and are payable by the employer only. These are reported on a P11d form and are due in on the 6th July with payment due online by the 22nd July.
Some examples of common expenses and benefits on which you would need to pay Class 1A NIC are:
· Company cars
· Health insurance
· Travel expenses
· Entertainment expenses
More examples can be found here on the HMRC website: https://www.gov.uk/expenses-and-benefits-a-to-z
Class 1B National Insurance
If you have a PSA which is a PAYE Settlement Agreement, then you pay tax and class 1B NI on the expenses and benefits included in the PSA. A PSA is an agreement with the employer and HMRC to cover certain types of expenses and benefits that are made to the employees. These are usually small or irregular payments made to the employee. More details of PSA can be found here: https://www.gov.uk/pay-psa/overview
In the meantime, here is a download for next month tax deadlines: September 2017