NATIONAL INSURANCE

What is National Insurance?

National Insurance contributions (NICs) are deductions from an individual’s income that fund social security benefits such as incapacity benefit, contribution-based jobseeker’s allowance, retirement pension and bereavement benefits.

National Insurance numbers

A National Insurance number is a person’s unique reference which enables the HM Revenue and Customs and the Department for Work and Pensions to identify an individual’s National Insurance contribution record. This ensures that the correct amount can be paid when a claim for benefit is made. Employees are required by law to give employers their National Insurance number.

National Insurance contributions

You make different contributions depending on your employment status. Employees have to pay Class 1 National Insurance contributions, which are normally collected by the employer via PAYE system deductions from their wage or salary. For the tax year 2007–08, Class 1 contributions were 11% of weekly earnings between £ 87 and £ 670 with an additional 1% on earnings above £ 670. (Lower rates apply if the employee belongs to a contracted-out occupational pension scheme.)

The self-employed pay Class 2 contributions at a flat rate of £ 2.20 per week (2007–08) and Class 4 contributions based on their annual profit. For profits between £ 5, 225 and £ 34, 840, Class 4 contributions of 8% of profits apply, with an additional 1% on profits above £ 34, 840 (2007–08).

Your obligations as an employer

If you employ staff, you are required to set up a payroll system in order to:

• Work out accurately and deduct PAYE tax and National Insurance contributions from each employee, each pay day.
• Record details of deductions and payments.
• Pay the money you deduct to HM Revenue and Customs each month or quarter.
• Notify HM Revenue and Customs when an employee joins or leaves you.
• Report details at the end of the tax year.
• Provide your employees with a record of pay and deductions for the tax year using a P60.

You may also need to:

• Deduct student loan deductions and stakeholder pension contributions.
• Make payments to your employees for tax credits, statutory sick pay and other statutory payments.

Limited companies – additional obligations

Limited companies are also required to pay Employer’s Class 1 National Insurance contributions for all employees. For the 2007–08 tax year, this was 12.8% of the employee’s weekly earnings above £ 100 a week.

Paying employee’s tax and National Insurance

As an employer, you must pay tax and National Insurance payments to HM Revenue and Customs every month. Payments must reach them by the 19th of each month. However, if you collect less than £ 1, 500 per month in tax and National Insurance contributions, you can apply to pay quarterly. In this case, payments must reach HM Revenue and Customs by the following dates:

• 5th July;
• 5th October;
• 5th January;
• 5th April.

To apply for the quarterly payment scheme you should complete a form P31 and forward it to your HM Revenue and Customs office.

National Insurance contributions for directors

For National Insurance purposes, a company director is classified as an ‘office holder’ and since 1999, alternative arrangements have operated for the assessment and payment of National Insurance for directors. Now, the earnings period for the assessment of director’s National Insurance contributions is an annual one, though payment can be made on account throughout the tax year.

National Insurance forms

Some of the main forms used for National Insurance are:

• P11 – Deductions Working Sheet, used to record the National Insurance contributions and tax deducted from employees’ pay.
• P11D – Reports the cash equivalent of any benefits provided to relevant employees.
• P45 – A 4-part form completed to show an individual’s pay and tax details up to the date of them leaving their employment.
• P46 – PAYE – Notice of new employee, used to inform HM Revenue and Customs about an employee who does not have a P45 to give you.
• P30BC – A book of payslips to be filled in and sent to HM Revenue and Customs with tax and National Insurance deductions.
• P32 – Employer’s Payment Record, used to work out total monthly payments.

Setting up your payroll system

HM Revenue and Customs provide some very useful information on setting up and running your payroll system, including an Employer’s CD-ROM, which provides very good guidance.

If you feel that you do not have the time or the means to set up and run your own payroll, there is a number of companies that provide payroll services to other businesses. Your accountant may also provide this facility. If you choose this option, once the system has been set up for your employees, you will telephone the payroll service with the hours your employees have worked. They will then calculate tax and national insurance and prepare wage slips on your behalf.

You can also buy payroll software packages that make the job of running your payroll system easier. Many packages are compatible with HM Revenue and Customs requirements. Look for the Payroll Standard Logo – this informs you that it has been tested by HM Revenue and Customs and meets their specifications.