4.The National Insurance Scheme was first established in 1911 and expanded in the late 1940s to provide funds for a more comprehensive and inclusive range of contributory benefits and to provide assistance with the funding for a new National Health Service.
5.Briefly, the scheme consists of a number of benefits financed by contributions payable by earners, employers and others. The money is collected via NICs. Employees pay NICs on their earnings, employers pay NICs on the earnings they pay to their employees and the self-employed pay NICs on their profits and gains.
6.The scheme defines the category of a worker as either an employed earner or a self-employed earner. An employed earner is a person who is gainfully employed in Great Britain or Northern Ireland either under a contract of service, or in an office (including elective office) with general earnings. A self-employed earner is a person who is gainfully employed in Great Britain or Northern Ireland otherwise than as an employed earner. Provision is made within the scheme to allow those who are not compulsorily covered to protect their entitlement to the state retirement pension by means of voluntary NICs payments.
7.NICs are divided into six classes.
Class 1 contributions, which are paid by both employees and employers on the employee’s earnings – the employee’s share is known as the primary contribution, the employer’s as the secondary contribution. Class 1 contributions are payable on all gross earnings including commissions, overtime and bonuses, on readily convertible assets given to employees and on employees’ liabilities paid by employers. Primary contributions are payable at 11% of earnings above £110 up to £844 per week (£5,715 to £43,875 per year) and 1% of all earnings above this limit. Secondary contributions are payable at 12.8% of all earnings above £110 per week. There are arrangements for reducing the rates of both primary and secondary contributions where the employee has contracted out of the State Second Pension. Class 1 contributions are normally collected monthly by HMRC along with PAYE income tax.
Class 1A contributions are payable annually by employers on most taxable benefits in kind. They are payable by employers only. Class 1A contributions are payable at a rate of 12.8%.
Class 1B contributions are payable annually by employers on items which are dealt with under a PAYE Settlement Agreement (PSA) for income tax. Class 1B contributions are payable at a rate of 12.8% on the value of the items included in the PSA and on the total tax payable by the employer under the PSA.
Class 2 contributions are paid by the self-employed at a flat rate of £2.40 per week – a self-employed person can apply to be exempted from liability where earnings are below £5,075 per year. Class 2 contributions are paid either monthly or quarterly.
Class 3 contributions are paid on a voluntary basis, at a flat rate of £12.05 per week, by people who fall outside the scope of Class 1 and Class 2 contributions.
Class 4 contributions are paid annually by the self-employed on profits that are immediately derived from a trade, profession or vocation and which are chargeable to income tax. Class 4 NICs are payable at a rate of 8% on profits between £5,715 and £43,875 and 1% of profits above £43,875.
8.In the Pre-Budget Report on 24 November 2008 the previous Chancellor announced an increase in NICs rates of 0.5% starting in 2011/12. In the Pre-Budget Report on 9 December 2009 the previous Chancellor announced a doubling of the previously announced increases. In the Emergency Budget on 22 June 2010 the Government confirmed the rate rises would remain in place as part of a wider package of measures, which also increased the income tax personal allowance, and the secondary threshold below which employers pay no NICs.
9.The Act includes provision to increase the following rates of NICs from 6 April 2011:
the main rates of primary Class 1 and Class 4 NICs will be increased by 1% to 12% and 9% respectively;
the Class 1 secondary rate of NICs will be increased by 1% to 13.8% and will also apply to Class 1A and Class 1B NICs; and
the additional rates of primary Class 1 and Class 4 NICs will be increased by 1% to 2%.
On 19 May 2010, the Chancellor of the Exchequer said, in a speech to the Confederation of British Industry:
“I want to help new businesses by abolishing employers’ National Insurance Contributions on the first ten jobs they create.”
10.At the Emergency Budget on 22 June 2010 the Budget documentation included the following:
“1.87The Government’s strategy to support private sector enterprise in all parts of the UK aims:
to encourage the creation of private sector jobs in regions reliant on public sector employment, through reducing the cost to new businesses of employing staff. The Government will shortly announce details of a scheme to help new businesses in targeted areas of the UK that need it most. During a three year qualifying period, new businesses which start up in these areas will get a substantial reduction in their employer National Insurance Contributions (NICs). Within the qualifying period, these employers will not have to pay the first £5,000 of Class 1 employer NICs due in the first twelve months of employment. This will apply for each of the first 10 employees hired in the first year of business and operate in selected countries and regions. Subject to meeting the necessary legal requirements, the scheme is intended to start no later than September 2010. Any new business set up from 22 June 2010 which meets the criteria set out in the forthcoming announcement will benefit from the scheme.”(2)
Amounts and rates are for the 2010-11 tax year.