National Insurance Contributions (NICs) are just as much a fact of life for growing businesses as taxes, and employers are under an equal obligation to calculate and pay them. The contributions count towards various Social Security benefits including retirement pensions, incapacity and widow's benefits and maternity allowances.
Each adult UK citizen has a National Insurance (NI) number. NI numbers consist of two letters, followed by six numbers, followed by one letter, A, B, C or D.
NI will be detailed on a form P45. Each new employee should be asked for their NI number. If the employee does not produce a form P45 and has forgotten or cannot remember their NI number the employer should keep a record of their full name, date of birth, sex and address. If there is no P45, employees should complete a form P46 , and this should be sent to the Tax Office. The employee's NI number will be traced automatically and the employer will be notified of it on form CA6855.
There are four different classes of NICs and it is important to know which one is applicable for each employee.
Class 1 is paid by employees (primary contributions) and employers (secondary contributions), Classes 2 and 4 by the self-employed, and Class 3 by anyone wishing to make up payments to meet the requirements for receiving associated state benefits.
Most contributions should fall under class 1. Employees pay 11% on earnings between the Primary Threshold and the Upper earnings limit while employers pay 12.8% secondary class 1 rate on earnings above the secondary threshold. As an employer you have to pay contributions on all your employee's earnings above the Lower Earnings Threshold (LET), for employees aged 16 but below the state retirement age.
NICs have to be worked out on a payment-by-payment basis. The contributions are calculated as a percentage of an employee's gross pay above the LET, based on the interval which the payment covers. Payment of NICs are made along with income tax to the Inland Revenue accounts office. This must be done by the 19th of the month following the month of deduction from the salary.
Gross pay is the employee's pay before any deductions. It includes for example:
- bonus payments
Calculating and paying NICs can be a significant challenge. HM Revenue & Customs supplies an Employer's Pack, which explains PAYE and NI. Included in this are tables to help calculate NIC's for both weekly and monthly paid employees. It is possible to outsource the task to a bureau company, however, be aware of the costs and commissions this will involve.
Alternatively employers can use an appropriate computer package, or design their own system that manages these obligations.