National Insurance or NI is the other main deduction that employees see from their pay packets and employers are required to make. NI contributions are worked out differently to tax with different starting points and other conditions. It is a key part of payroll and can be quite complex, which is why managed payroll can be the best course of action.
Here’s a guide to working out NI contributions as both employer and employee to help you understand it.
Who pays national insurance?
National insurance must be paid by people who are employed, but also by people who are self-employed. The contribution amount depends on how much you earn, and if you earn under a certain figure, you don’t have to pay for this. Contributions count towards benefits and to the state pension when you reach retirement age.
Employers also must pay national insurance for their employees – this is known as Class 1. If you are self-employed, you must pay both sets, both as the employer and as the employee. If you are self-employed but also do some work as an employee, you need to pay NI through your pay slips that include the employer’s contribution of 13.8%.
Current NI rates
National insurance payment rates are set by the government but can be changed. The rate is applied to gross earnings, in other words, the amount you are paid before any tax or other deductions are taken. If you earn above a certain threshold, then you must make the payment. Class 1 NI is collected from:
- Commission or bonus payments
- Sick pay, maternity, paternity or adoption pay
The government has a system of thresholds to help people see how much national insurance they should be paying. For the 2018-19 tax year, these thresholds are worked out on a weekly payment basis.
- Lower earnings limit (LEL) – employees who don’t pay NU but get the benefits of paying it – £116
- Primary threshold (PT), Secondary Threshold (ST) – employees start paying NI – £162
- Upper Accrual Point (UAP) – employees with a contracted-out pension pay at a rate lower than NI – no payment
- Upper Earnings Limit (UEL) – a lower rate of NI paid – £892
- Upper Secondary Threshold (USL) – employers who have employees under 21 pay no NI up to this point – £892
- Apprentice Upper Secondary Threshold (AUST) – employers of apprentices under 25 pay no NI up to this point – £892
The system looks a bit complicated, but the majority of people will either fall into the category of paying no NI, basic NI or the higher component, depending on their wage. If you earn above the secondary threshold, you will pay 12% of your income over the threshold figure in NI. For people above the Upper Earnings Limit, you will pay 2% on earnings from this figure upwards.
Married woman’s rate
Until 1977, married female employees could opt out of paying NI at the full rate and pay a reduced rate known as the married woman’s stamp. This did stop them building up a state pension of their own and meant they relied on their husband’s. They had the choice of either continuing to pay at the full rate or pay the reduced rate. If they paid the reduced rate, this would see them entitled to 60% of the current basic state pension.
Since 2016, any woman who is not yet at pension age will no longer be able to do this. Their pension entitlement will be worked out by the number of years they have made NI payments instead with 10 years being the minimum requirement.
How much do employers pay?
The other big question is how much the employer must pay towards national insurance for their staff. This is again worked out based on how much they earn and is a bit simpler than working out the employee figure.
Once an employee passes the second threshold of £162 a week, the employer must pay 13.8% of the gross pay above the figure. There is no upper secondary threshold for employer payment, but the NI must be paid on expenses and benefits as well as pay.
Paying NI contributions via PAYE
Employers pay national insurance contributions alongside income tax via the system known as PAYE – Pay as You Earn. This avoids the need for employees to pay large bills at any time and the amount is deducted from their wage each month before they receive it.
Employers need to make their PAYE bill to HMRC by either:
- 22nd of the next tax month if you pay monthly
- 22nd after the end of the quarter if you pay quarterly – so April-July would need to be paid by 22nd July
The PAYE bill must include a series of information for each employee so that HMRC can register the information for them. This includes:
- Employee income tax deducted
- National insurance deducted
- Any student loan repayments or specialist payments like the CIS
- Apprenticeship levy payments if relevant
Businesses need to make NI payments on time, or HMRC can add interest and penalties to the amount due, which would have to be paid by the business. There are various options available to make the NI payment including by online or telephone banking, debit or business credit card, BACS or CHAPS payments or by setting up a direct debit ahead of time. Businesses can also send a cheque but need to remember deadlines and send it ahead of time.
If the business hasn’t paid any employees for at least one tax month, then they need to fill out the Employer Payment Summary (EPS) to show that there are no NI contributions due. This needs to be sent by the 19th of the month following the tax month where no payments were made.
The easiest way to ensure all these conditions and deadlines are met is to use a payroll service. Trace Payroll offer managed payroll for businesses of all sizes to help ensure you handle all requirements on time and avoid those penalties and extra interest.