How does National Insurance work for employers and the self-employed?

DSA Prospect - How does National Insurance work for employers and the self-employed?

Whether you're responsible for overseeing employee payrolls or handling your own contributions, managing National Insurance contributions is a notoriously complicated and time-consuming process for employers and the self-employed.

National Insurance (NI) plays a vital role in the UK's tax system and serves as the second-largest revenue source for HMRC. The money generated through National Insurance contributions fund important government expenditures such as the National Health Service (NHS) and state pensions.

Accurate calculation and proper submission of National Insurance contributions (NICs) are essential to ensure that employees and self-employed individuals receive the benefits they are entitled to - but this often requires having a detailed understanding of NICs.

In this blog, you'll gain an understanding of the basics of National Insurance in the UK. We'll cover various aspects, including what National Insurance is, the different classes of contributions, and the rates and thresholds for employers, employees and the self-employed.

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National Insurance Basics Explained

 

  An Employer's Guide to National Insurance Contributions

Employer National Insurance is tax paid by employers on behalf of themselves and their employees. These contributions are paid to HMRC on a weekly or monthly basis - dependant on an employee's pay schedule. Failing to submit NICs on time or incorrectly can result in a penalty from HMRC and can affect an employee's rights to benefits.

 

Class 1 National Insurance contributions

Class 1 NICs apply to employees and their employers. It is the most common class and involves contributions from both parties. The contributions are based on the employee's earnings and are deducted automatically through the Pay As You Earn (PAYE) system. Employers are responsible for submitting these deductions to HMRC on a regular basis.

 

Employer vs. Employee NICs

Before receiving their pay, a portion of an employee's salary is automatically deducted by their employer and set aside for National Insurance contributions to be paid to HMRC - these are known as Employee National Insurance contributions.

In addition, employers must pay a separate contribution that doesn't directly affect an employee's take-home pay. These Employer National Insurance contributions represent an additional cost associated with maintaining a workforce which can have a ripple effect on a business's cash flow. It also requires a considerable amount of time and effort.

Employers bear the responsibility of overseeing the entire National Insurance process, which involves deducting and submitting both the employee and employer NICs.

 

Employer and Employee National Insurance rates and thresholds

Employer and employee National Insurance contributions are based on earnings, as well as, rates and thresholds that are set by the government and can change from year to year.

Employers need to stay updated with the current rates and thresholds to ensure they are deducting the correct amount from their employees' earnings. Similarly, employees should be aware of the rates and thresholds to understand how much they will need to contribute towards National Insurance.

Class 1 National Insurance Thresholds 2023/24

  Weekly Monthly  Annually
Low Earnings Limit £123 £533 £6,396
Primary Threshold * £242 £1,048 £12,570
Secondary Threshold ** £175 £758 £9,100
Upper Earnings Limit £967 £4,189 £50,270

This is a summarised list of National Insurance thresholds. You can find the full list here

* Employees begin paying National Insurance when they reach the Primary Threshold.

** As an employer, your National Insurance payments begin when your employee's earning reach the Secondary Threshold.

Class 1 Employer National Insurance Contribution Rates 2023/24

  2023/2024  
Threshold Employer Rate  
Rate above the Secondary Threshold 13.8%  
Rate below the Secondary Threshold 0%  
 

Class 1 Employee National Insurance Contribution Rates 2023/24

  06/01/2024 - 05/04/2024 06/04/2023 - 05/01/2024
Threshold Employee Rate Employee Rate
Between Primary Threshold & Upper Earnings Limit 10% 12%
Above Upper Earning Limit 2% 2%

This is a summarised lists of National Insurance employer and employee rates. You can find the full list here

 

Managing National Insurance as an employer

Managing National Insurance contributions involves two important steps that employers must follow: reporting and payment. These steps are crucial to maintaining compliance and ensuring the seamless operation of the NI system.

  1. Reporting to HMRC is a crucial part of the process. Employers will need to report the earnings and National Insurance contributions for each employee, which is typically done through the Pay As You Earn (PAYE) system. It's important to note that this information must be reported regularly, usually on or before each payday.
  2. Paying National Insurance contributions is a responsibility that falls on employers. They are responsible for deducting National Insurance contributions from the employee's salary and making their own contributions. These contributions must be paid to HMRC in a timely manner.

 

Navigating National Insurance for the Self-Employed

For self-employed individuals in the UK, it's important to understand the role of National Insurance. Similar to employers and employees, the self-employed are required to make NI payments to contribute to the state pension system and ensure eligibility for certain benefits such as Statutory Sick Pay (SSP) and Maternity Allowance.

To determine whether a self-employed person needs to pay National Insurance, they'll need to review their profits for the relevant financial year. The amount of self-employed NICs owed, if any, will be determined by the threshold reached and the specified NI rate.

The self-employed pay two types of National Insurance depending on profits: Class 2 (until 06/04/2024) and Class 4.

 

Class 2 National Insurance contributions

In a notable shift for self-employed individuals, a recent policy change in the Autumn Statement 2023 announced the withdrawal of Class 2 National Insurance contributions from the 6th April 2024.

However, until this date, self-employed individuals are still obligated to pay Class 2 NICs at the weekly rate when their profits meet or surpass the Lower Profits Threshold.

Class 2 National Insurance Thresholds & Rates

  2023/2024
Small Profits Threshold amount per year £6,725
Lower Profits Threshold amount per year £12,570
Rate per week £3.45
  • If earnings fall between the Small Profits Threshold and the Lower Profits Threshold, you're considered to be making Class 2 contributions at a 0% rate.
  • Even if profits are below the Small Profits Threshold, it's not uncommon for self-employed individuals to choose to voluntarily pay Class 2 National Insurance to ensure they have a qualifying year.

 

Class 4 National Insurance contributions

The self-employed are also required to make Class 4 NICs, which are based on their profits. Self-employed individuals become liable for Class 4 National Insurance when their profits reach the Lower Profits Limit.

Class 4 National Insurance Thresholds & Rates

  2023/2024
Lower Profits Limit £12,570
Upper Profits Limit £50,270
Rate between Lower & Upper Profits Limits 9%*
Rate above Upper profits limit 2%

* The main rate of Class 4 self-employed NICs will be reduced from 9% to 8% from the 6th April 2024.

 

National Insurance reporting and payment obligations for the self-employed 

Self-employed individuals are responsible for making their National Insurance payments as part of the Self Assessment process. The deadline for submitting a tax return and making any outstanding payments is the 31st of January. 

To streamline this process, we recommended maintaining well-organised records of income and expenses throughout the year.

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Having a solid understanding of National Insurance is essential for both employers and self-employed individuals alike. It not only ensures that you're staying on the right side of HMRC, but also provides the right to important state benefits, allows for accurate financial planning, and enables effective management of employment status and tax obligations.

Many employers find it advantageous to outsource their payroll management. This not only saves them valuable time and money, but also gives them access to professionals who specialise in staying up-to-date with the ever-evolving regulations and specific employment allowances that can help reduce their National Insurance liability. Likewise, sole traders frequently seek the guidance of an accountant to carry out their tax return submissions and NI payments.

How can we help? In addition to handling payroll and Self Assessment tasks, our professional tax planning services can assist in refining your overall strategy and improving how you handle National Insurance responsibilities. By analysing your situation carefully and planning ahead, we aim to make sure you not only meet legal obligations but also take advantage of opportunities for financial efficiency - ultimately contributing to your long-term financial success.

DSA Prospect - National Insurance Payroll and Tax Planning Services

This blog was updated on: 24/01/2024

This blog was originally published on: 06/03/2023

Disclaimer: The information shared on the DSA Prospect website and social media accounts (inclusive of all content, blogs, communications, graphics, guides and resources) is meant to provide helpful insight and discussion on various business and accounting related topics. It contains only general information that is subject to legal and regulatory change and is not to be used as an alternative to legal or professional advice. DSA Prospect Limited accepts no responsibility for any actions you take, or do not take, based on the information we provide and we always recommend that you speak with qualified professionals where necessary before making any decisions.

 

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