| Income tax remains the main form of direct taxation in the UK. But in his 2002 Budget the Chancellor has indicated that he intends to use increase National Insurance contributions as a key mechanism to raise extra funds for the NHS. |
| National insurance - what it is |
National Insurance was introduced in 1948 to provide funds for the provision of welfare benefits such as retirement pensions and sickness and unemployment benefits. National Insurance contributions remain the basis of state benefits, and provide for other benefits, such as maternity benefit and widows’ pensions. |
| How much you pay |
Until now, contributions were tied to a lower and upper earnings limit. |
| The upper earnings limit is the amount of income that is assessed for your National Insurance contributions. Therefore, if the upper limit is increased, then the individual will be liable to pay more National Insurance, so reducing the real wage. No matter how much you earned, earnings above the upper limit were not subject to National Insurance. At present, National Insurance for employees becomes payable on earnings above £89 per week, or £4,615 a year, up to £585 a week, or £30,420. For 2002-03, the level of NI payable on earnings between those two figures will be 10 per cent. From 6 April 2003, this will change. The ceiling will be raised in line with inflation, to £30,940. In addition, in the 2003-04 tax year, NI rises to 11 per cent between the lower and upper earnings limit. Earnings above the upper limit will face an additional 1 per cent charge. Effectively, this raises the higher rate of tax from 40 to 41 per cent. |
| What types of National Insurance are there? |
| Class 1 Employers and employees (with earnings above the lower limit) pay this. The amount they pay is based on the income above the lower and upper earnings limit. |
| Class 2 Contributions are paid by the self employed but not those whose income is below a certain level. This is a weekly flat rate. It entitles the contributor to most social security benefits but not unemployment, invalidity or widows pension. |
| Class 3 Contributions are voluntary. They are paid by those who do not earn enough to pay Class 1 or Class 2 contributions but would like to top up their benefit entitlement so that they can enhance the value of their state pension. |
| Class 4 Contributions are paid by the self-employed. They are a fixed percentage on profits that are chargeable to income tax and fall between the lower and upper earnings limits. The self-employed receive no extra social security benefits for paying Class 4. However, they receive some tax relief on Class 4 contributions. The most common types of National Insuurance are Class 1 and 4. |
| Who pays what |
| National Insurance rates | 2002-03 | 2003-04 |
| Primary threshold | £89 per week | £89 per week |
| Secondary threshold | £89 per week | £89 per week |
| Employees’ primary Class 1 rate on earnings between primary threshold and upper earnings limit | - | - |
| Employers’ primary Class 1 rate on earnings above secondary threshold | 10% | 11% |
| Employers’ secondary Class 1 rate on earnings above secondary threshold | 11.8% | 12.8% |
| Lower profits limit (for self-employed Class 4 contribution) | £4,615 | £4,615 |
| Class 4 rate on profits between lower and upper profits limit | 7% | 8% |
| Class 4 rate on profits above upper profits limit | - | 1% |
| Does anyone not pay National Insurance? |
Aside from those not in work, the other category who does not pay National Insurance are people of retirement age. The exemption aplies not just to pension income but also earnings from any work carried on past retirement age. To qualify for non-payment of National Insurance contributions, once a person has reached retirement age they should contact Pensions Direct, a new government agency, to ask for an exemption certificate. The number is 0191 2030203. |
| How to reduce the effect of National Insurance contributions |
There are not many ways of doing this. One of the more popular methods is ‘salary sacrifice’. This is where an employee foregoes an increase in his or her salary in return for increased employer contributions into an occupational pension. Pension contributions are not subject to NI. Salary sacrifice offers benefits for employers since they are also not liable to pay NI on contributions into a pension scheme |
