Taxes… they are never ending. National Insurance is basically just another tax. National Insurance Contributions (NICs) were set up in order to fund a number of state benefits, including the state pension, the NHS and additional welfare schemes. Your contributions are deducted from your earnings.

 

It’s pretty straightforward on the surface. However, as any london accountant will tell you, mistakes can arise and they can be costly. One of the main errors is paying the wrong NICs. There are different National Insurance types and you need to make sure you are paying the right one. Keeping that in mind, in this post we will take a look at all kinds of national insurance in further detail.

 

The five main types of NICs are as follows – Class 1, Class 1A, Class 2, Class 3 and Class 4. Things can get a bit more complicated for limited company directors and people who are self-employed, so we will discuss this in further detail as well. But first, let’s take a look at the different National Insurance types…

 

Class 1 – This is the most common type of NIC. Both the employee and the employer will pay the contribution, with the main contribution being paid by the employee and the secondary contribution being paid by the employer. It is calculated as a percentage of the employee’s wage. However there is an upper earnings limit.

 

Class 1A – This is designed for employees that get special benefits as part of their job. A company vehicle is a prime example. In such circumstances, the employer must pay a special rate, which is calculated based on the value of the taxable benefits the employee has received throughout the tax year.

 

Class 2 – Class 2 contributions are designed for the self-employed. This is a compulsory rate, yet you are exempt if you earn below a certain limit.

 

Class 3 – Class 3 are voluntary NICs. If you have gaps in your NIC record you may want to pay some voluntary contributions in order to top it up. HMRC may actually get in touch with you to advise that you do so.

 

Class 4 – If you are self-employed and your profits are over a certain amount per annum you may need to pay Class 4 contributions as well.

 

So now you know a little bit more about the different types of National Insurance. As you can see, those who are self-employed have two classes of NICs to pay. For the current tax year, you will pay £2.75 per week in Class 2 NICs if you earn more than £5,885 per year. Class 4 NICs is calculated based on a percentage of your profits. You will pay nine per cent if you earn between £7,956 and £41,865. An extra two per cent is required on earnings more than £41,865.

 

Last but not least, things can also get a little bit confusing if you are a limited company director. As you are technically an employee of your company you have to pay Class 1 contributions and your company is also liable to pay the secondary contributions.

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