Contribution classes

Contribution classes

National insurance contributions (NICs) fall into a number of classes. Class 1, 2 and 3 NICs paid are credited to an individual's NI account, which determines eligibility for certain benefits - including the state pension. Class 1A, 1B and 4 NIC do not count towards benefit entitlements but must still be paid if due.

Class 1

Class 1 contributions are paid by employers and their employees. In law, the employee contribution is referred to as the 'primary' contribution and the employer contribution as the 'secondary', but they are usually referred to simply as employee and employer contributions.

The employee contribution is deducted from gross wages by the employer, with no action required by the employee. The employer then adds in their own contribution and remits the total to HMRC along with income tax.

There are three milestone figures which determine the rate of NICs to be paid: Lower Earnings Limit (LEL), Earnings Threshold (ET) and Upper Earnings Limit (UEL). In this context "earnings" refers to an employee's wage or salary. The cash value of each of these limits changes each year, either in line with inflation or by some other amount decided by the Chancellor.

• Below the LEL, no NICs are paid because no benefits can accrue on earnings below this limit.
• On earnings above the LEL and below the ET, contributions are not paid but are credited by the government as if they were. This effectively assists the working poor to get benefits. Additionally, where the employee and employer contribute to certain types of occupational pension scheme, there is a negative contribution rate on earnings in this band - this 'rebate' can be offset against contributions in other earnings bands.
• On salaries between the ET and the UEL, NICs are collected at a rate which is determined by a number of factors:
  • The type of occupational pension scheme (if any) to which the employee and employer make contributions
  • Whether the employee has reached the age at which state retirement pension becomes payable
  • Whether the employee is a married woman paying reduced-rate contributions. This facility was abolished on 11 May 1977 but women who were already paying these contributions at that time were allowed to opt to continue to do so for as long as they remained married.
  • Whether the employee is an ocean-going mariner or deep-sea fisherman
• On the portion above the UEL there are again various rates, depending on similar factors to those relating to the previous earnings band, with the exception that the type of pension scheme no longer has a bearing.

Unlike income tax the limits for class 1 NICs for ordinary employees are calculated on a periodic basis, usually weekly or monthly depending on how the employee is paid. However those for company directors are always calculated on an annual basis, to ensure that the correct level of NICs are collected regardless of how often the director chooses to be paid.

In the March 2011 Budget, the Chancellor announced that in future, employee NI thresholds will be indexed to inflation using the , while employer thresholds remain indexed using the