January 27, 2011
National Insurance (NI) is a tax in all but name. It is a heavy imposition, particularly on the employed sector. In many businesses, the figure that has to be paid over monthly or quarterly to HM Revenue & Customs, representing the total tax and NI deducted from employees' salaries plus the employer's NI contributions, now consists more of NI than tax. Quite an amazing fact, really, considering how understated NI can be as far as publicity is concerned. That is how substantial a tax it has become.
The trend is for NI to be merged with the tax system. In fact there was, and still is, a crazy system of different rules applying to the levels at which tax and NI were applied to incomes requiring in effect two distinct sets of computations to be applied to the same income, in order to determine NI liability on the one hand and income tax on the other. Eventually there may be a unified system, but we are still a long way from that.
Broadly speaking, the principal difference between income tax and NI is that the former applies to income of all types, but the latter applies only to what might loosely be termed earned income. This is income from employment and self-employment. Specifically, investment income from things like interest, dividends or rent is excluded from NI, although liable in general to income tax.
Let's look at the types of NI contribution. They are known as "classes" and there are four, although the first is subdivided into some lesser types.
This is probably the most common, being the NI contributions payable by employed people. It consists of two parts, known officially as the primary contribution and the secondary contribution. The primary contribution is payable by the employee, the bit you see deducted from your wages if you are employed. The secondary contribution is payable by the employer.
Class 1 applies only to those aged over 16. Below that there are neither primary nor secondary contributions required. At the other end of the age scale, primary contributions are not required by those over the state pensionable age, currently 60 for women and 65 for men. Note though that secondary (i.e. employer) contributions still have to be made in respect of employees over these ages.
Class 1A - This is a special employer rate, payable on benefits provided to employees.
Class 1B - This again is an employer-only rate payable on PAYE settlement agreements. It's an obscure point that arises where an employer provides a modest taxable benefit to a large group of employees.
This is a compulsory self-employed contribution. The usual method of payment is by direct debit, although it can be paid by quarterly invoice.
These are voluntary flat rate contributions which can be paid by those under the same ages as above, where the contribution record may otherwise be inadequate to claim a pension. Class 3 NI could be paid, for example, by those who are not working and not receiving social security benefits of some kind, by those abroad, by mature students and so on.
NI for the self-employed again. These are compulsory percentage-based contributions payable on annual profits. Upper age limits above apply; contributions are not required from men over 65 or from women over 60.
And that's it for the classes of contributions required for NI. Note that the self-employed are required to pay both classes 2 and 4.
What do you get for your money?
Unlike income tax, NI is the basis for a range of state benefits, the retirement pension probably being the most common. Those benefits are in many cases based upon the contribution record of the individual, and are not the same for everyone.
The self-employed get a poor deal too, but then they often pay less than an employed person on a similar income. For example, they are not entitled to Jobseekers' Allowance or the Second State Pension.
Please see the HMRC website for current National Insurance rates.