National insurance contributions (NICs) are essentially a tax on earned income. The national insurance (NI) regime divides income into different classes: class 1 contributions are payable on earnings from employment, while the profits of the self-employed are liable to class 2 and 4 contributions.

NI is often overlooked yet it is the largest source of Government revenue after income tax.

The Department of Social Security used to be responsible for administering NI through the Contributions Agency. From April 1999 the NI functions have been taken over by the Revenue to promote greater alignment of tax and NICs. The NI section is now called The Inland Revenue (National Insurance Contributions Office).

We highlight below the areas you need to consider and identify some of the potential problems. Please contact us for further specific advice.

SCOPE OF NICs

Employees
Employees are liable to pay class 1 NICs on their earnings. In addition a further secondary contribution is due from the employer.

Employee contributions are only due when earnings exceed a 'lower limit' (currently £76 a week). The amount payable is 10% of the earnings above £76 up to earnings of £535 a week. The maximum weekly employee contributions are currently £45.90.

Secondary contributions are due from the employer of 12.2% of earnings above a 'threshold' (currently £84 a week). There is no upper limit on the employer's payments.

Benefits in kind
Employers providing benefits in kind such as company cars for employees have a further NIC liability under class 1A. Contributions are payable on the amount charged to income tax as a taxable benefit.

Prior to 6 April 2000 only company cars and fuel were subject to Class 1A. From this date most benefits are subject to employer's NI.

The current rate of Class 1A is the same as the employer's secondary contribution rate - ie 12.2%.

The self-employed
NICs are due from the self-employed as follows

flat rate contribution (class 2)

variable amount based on the taxable profits of the business (class 4).

Class 2 contributions are generally paid by direct debit while class 4 contributions are collected with the income tax liability payable on the profits of the business.

Voluntary contributions
Flat rate voluntary contributions are payable under class 3. They give an entitlement to basic retirement pension and may be paid by someone not liable for other contributions to maintain a full NI record.

POTENTIAL PROBLEMS

Time of payment of contributions
Class 1 contributions are payable at the same time as PAYE ie monthly. Class 1A contributions are not due until 6 July after the tax year in which the benefits were provided.

It is therefore important to distinguish between earnings and benefits.

Earnings
Class 1 earnings will not always be the same as those for income tax. Earnings for NI purposes include

salaries and wages

bonuses, commissions and fees

holiday pay

certain termination payments.

Problems may be encountered in relation to the treatment of

expense payments

benefits in kind.

Expense payments will generally be outside the scope of NI where they are specific payments in relation to identifiable business expenses. Round sum allowances give rise to an NI liability.

In general benefits are not liable to Class 1 NIC.

There are however some important exceptions including

most vouchers.

stocks and shares.

other assets which can be readily converted into cash.

the payment of an employee's liability by an employer.

Directors
Directors are employees and must pay class 1 NICs. However directorships can give rise to specific NIC problems.

For example
· directors may have more than one directorship

fees and bonuses are subject to NI when they are voted or paid whichever is the earlier.

directors' loan accounts where overdrawn can give rise to a NIC liability.

We can advise on the position in any specific circumstances.

Employed or self-employed
The NI liability for an employee is higher than for a self-employed individual with profits of an equivalent amount. Hence there is an incentive to claim to be self-employed rather than employed.

Are you employed or self-employed? How can you tell? In practice it can be a complex area and there may be some situations where the answer is not clear. In general terms the existence of the following factors would tend to suggest employment rather than self-employment

the 'employer' is obliged to offer work and the 'employee' is obliged to accept it.

a 'master/servant' relationship exists.

the job performed is an integral part of the business.

there is no financial risk for the 'employee'.

It is important to seek professional advice at an early stage and in any case prior to obtaining a written ruling from the Revenue.

If the Revenue discover that someone has been wrongly treated as self-employed, they will re-categorise them as employed and are

likely to seek to recover arrears of contributions from the employer.

Enforcement
The NIC Office is expected to make over 100,000 compliance visits each year in an attempt to identify and collect arrears of NICs. They may ask to see the records supporting any payments made.

The Revenue has the power to collect any additional NI that may be due for both current and prior years. Any arrears may be subject to interest and penalties.

Please contact us for advice on NI compliance and ways to minimise the effect of a NIC Office visit.

HOW WE CAN HELP

Whether you are an employer or employee, employed or self-employed, awareness of NIC matters is vital.

The Revenue have wide enforcement powers and anti-avoidance legislation available to them. Consequently it is important to ensure that professional advice is sought so that all compliance matters are properly dealt with.

We would be delighted to advise on any compliance matters relevant to your own circumstances.

For information of users:
This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.