UK National Insurance Contributions


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2004 Budget Update

Employees

Class 1 national insurance contributions (NICs) are paid on employees' earnings, usually by both the employee and employer. NICs are payable on all gross earnings, including salary, overtime, commissions and bonuses, on readily convertible assets given to employees, employees' liabilities paid by employers and on contributions to funded unapproved retirement benefit schemes (FURBS). Employers' Class 1A NICs are payable on all taxable benefits-in-kind other than the provision of childcare.

Employee NICs are payable at 11% of income above £91 up to £610 per week (£4,745 to £31,720 per year) and 1% of income above this limit. Earnings from £79 per week count towards contributory benefits. Employees over state pension age or under 16 do not pay NICs.

The employer NIC rate for 2004/05 is 12.8 % on all earnings above £91 a week (£4,745 a year)..

Class 1 Employees (not contracted out of S2P or SERPS)

2003/04		2004/05
Earnings pw		Earnings pw
Employees
First £89	nil	First £91	nil
£89 to £595	11%	£91 to £610	11%
Excess over £595	1%	Excess over £610	1%
Employers
First £89	nil	First £91	nil
Balance	12.8%	Balance	12.8%

Self-employed

Class 2 NICs are flat-rate contributions of £2.05 a week (£106.60 a year) where a person's self-employed earnings are over £4,215 a year.

Class 4 NICs are based on Sch D Case I or II profits for the year. For 2004/05 they are chargeable at a rate of 8% on profits between £4,745 and £31,720 and 1% on profits above this. Class 4 NICs are not payable by self-employed people over state pension age or under 16 years.

Voluntary

Class 3 NICs are voluntary flat-rate NICs payable by individuals who would otherwise fail to qualify for retirement pension and certain other benefits because they have an insufficient Class 1 or Class 2 contribution record. The flat rate is £7.15 a week (£371.80 a year).

Contracting out of S2P

If the employer has contracted the employee out of the State Second Pension (S2P), the NIC rates are reduced.

The reduction applies to the NICs on earnings up to £610 a week.
The employee's reduction is 1.6% and the employer's reduction is 3.5% for salary-related schemes. For money-purchase schemes the employer's reduction is 1%, but an additional age-related payment is made to the schemes by the National Insurance Contributions Office.
A rebate equal to the employer's and employees' NIC rate reductions is given on earnings between £79 and £91 a week.

If the employee contracts out using an appropriate personal or stakeholder pension scheme, the full NIC rates are payable and the National Insurance Contributions Office pays a rebate to the pension provider of the employee's choice.

The rebate is a percentage of earnings between £79 and £610 a week. The percentage increases with age to an upper limit. For personal pensions and stakeholder pensions a different level of rebate applies to each of three earnings bands.

The Dyer Partnership, 17 Westminster Court, Hipley Street, Old Woking, Surrey GU22 9LG