Definition of national insurance

In addition to income tax, the self employed may be liable to pay, and employees may suffer deduction of, national insurance contributions (NIC). For employees these are payable where earnings exceed an earnings threshold which is £153 per week for 2014/15 (£149 per week previously). Earnings at or below the threshold do not attract a contribution liability, and contributions are charged at 12 percent on earnings above the threshold, up to an upper limit of £805 per week (previously £797). A further charge of 2 per cent applies to all earnings above the upper limit. If the employee is contracted out of the state earnings-related pension scheme a reduced rate of 10.6 per cent is applicable on earnings below the upper earnings limit.

Employers also pay national insurance contributions on the earnings of their employees, above the earnings threshold. The employers' rate is 13.8 per cent (with reduced rates below the upper earnings limit where the employee is contracted out). From April 2014 there will be an allowance of £2,000 per year for all businesses and charities to be offset against their employer bill from April 2014. The allowance will be claimed as part of the normal payroll process through real time information (RTI).

Contributions for the self-employed consist of (for 2014/15) a flat rate charge of £2.75 per week (Class 2 NIC) and a charge equal to 9 per cent of profits between the lower and upper limits of £7,956 and £41,865 plus 2 per cent of profits above the upper limit (Class 4 NIC). The Government is considering the potential integration of the operation of PAYE and NICs.[1]

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