Guide to Different Types of National Insurance

Most people who work have to pay HM Revenue & Customs (HMRC) National Insurance Contributions (NICs) as well as tax. Payment of  NICs may entitle you to benefits, such as a state pension and jobseeker’s allowance. Some are paid at a flat rate with others, the amount payable is linked to earnings.
N I C Rates

Class 1 NICs are calculated using three levels of earnings set by the government – the earnings threshold (ET), the lower earnings limit (LEL) and the upper earnings limit (UEL). The LEL is the level at which employees are entitled to National Insurance benefits, even if they are not paying any contributions.

The actual rates are set at budget time and are complex see HMRC table. Employees pay 11% and employers 12.8% of chargeable pay.

N I C for employees and employers

Class 1 NICs

Employers are responsible for calculating, deducting and paying Class 1 primary NICs employees’ contributions, to HM Revenue & Customs (HMRC) on behalf of all employees earning above the earnings threshold. These must be deducted from their earnings. Employers must also calculate and pay Class 1A NICs due on taxable benefits given to employees

Employers must calculate and pay Class 1 secondary NICs employers’ contributions for all employees earning above the earnings threshold.  Employers must keep adequate records showing how NICs were calculated and what payments have been made for each employee.

The self-employed and National Insurance

Self-employed people pay two types of  NICs – Class 2 and Class 4.
Class 2 NICs

Most self-employed people pay Class 2 NICs at a weekly rate of £2.40 in 2009/10 You can apply for a certificate of exception if you have expected earnings of less than £5,075 in 2009/10.

Self-employed people do not have to pay Class 2 NICs if they are pensioner, under 16,  married women or widows entitled to pay reduced rate Class 1 NICs
Class 4 NICs

Class 4 NICs are paid in addition to Class 2 NICs by self-employed people who make a profit over a certain limit in the tax year   this limit is set at £5,715 in 2009/10. Self-employed people declare their profits annually on a self-assessment tax return.

Payment is made to HM Revenue & Customs either monthly by direct debit or by quarterly bill.

Class 3 NICs

These are paid voluntarily by individuals who want to protect their right to certain benefits, but have not paid sufficient contributions. Individuals are responsible for finding out if they need to pay Class 3 NICs and for setting up a method of payment.

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