National Insurance contributions: understanding payroll deductions

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National Insurance contributions: understanding payroll deductions

As an employer, it is your legal responsibility to complete all payroll tasks.

Most businesses in the UK process payroll via PAYE, which is the system used by HMRC to calculate National Insurance and income tax deductions from employee wages. Below we answer some common questions about NI contributions for employers.

Do employers have to pay National Insurance contributions (NIC)?

In short, yes. You are required to pay National Insurance contributions on your employees’ benefits and earnings. Through the PAYE system, you are also responsible for collecting your employees’ income tax deductions and Class 1 NICs.

What is employer Class 1 National Insurance?

There are two types of Class 1 National Insurance contributions. Primary Class 1 NI contributions are an employee contribution while Secondary Class 1 NI contributions are paid by employers on their employees’ earnings. Note: both are collected via PAYE.

How are National Insurance contributions calculated?

Employers will need to use an employee’s NI category letter when they run payroll to figure out how much they both need to pay. Set by the Department of Work and Pensions, there are eight categories in total, although most people will fall under category letter A. Employers will need to use letter X for employees who do not have to pay National Insurance, for example, because they are under 16. Other categories include C (employees over the State Pension age), H (apprentices under 25) and M (employees under 21).

The employment allowance, which lowers the amount of employer NI contributions required by some businesses, has a limit of £4,000 per year. As of April 2020, this allowance is only available to businesses with a total NIC bill below £100,000.

How much does your business need to pay?

Employers have to pay Class 1 NICs of 13.8% for nearly all employees on any earnings above the secondary threshold. For 2020/21, the rate is £8,722 per year, £732 per month or £169 per week. For upper secondary thresholds, this is £50,000 per year, £4,167 per month or £962 per week.

Is Employer National Insurance payable on expenses?

Providing they are costs that have been incurred by the employee, reimbursed expenses are exempt from NICs and tax. These include subscriptions and fees, work-related travel and business entertainment expenses.

To find out more about National Insurance contributions and any other payroll deductions, contact us at SQK Accountancy today.

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