National Insurance contributions (NICs) are the UK’s second-biggest tax, expected to raise almost £150 billion in 2021–22 – about 20% of all tax revenue!
From April 2022 the rate of NICs will change for one year increasing by 1.25 percentage points. The additional contributions will be spent on the NHS and social care across the UK.
NICs are paid by employees and the self-employed on their earnings, and by employers on the earnings of those they employ. NICs are levied on the earnings of individuals aged 16 or over. Individuals over the state pension age are not liable for employee or self-employed NICs, but employer NICs are still due on their earnings.
Unlike income tax, NICs are not charged on income from other sources such as savings, pensions or property. Payment of NICs qualifies individuals to receive certain social security benefits (most notably the state pension). In practice, however, the link between contributions paid and benefits received is vanishingly weak and NICs essentially act as a second income tax.
NICs are formally divided into classes. NICs on employment income are Class 1 NICs; employees pay primary Class 1 NICs, while employers pay secondary Class 1 NICs.
Employees start paying the contribution if their earnings are more than £184 a week and the rate is 12% up to £50,270 income and then it drops to 2%. Employers pay NIC at the rate of 13.8% from £9,568 of employee’s annual income.
The self-employed pay two classes of NICs:
- Class 2 NICs are paid at a low, flat rate – currently £3.05 per week – by anyone whose self-employment income (profits) exceeds the small profits threshold of £6,515 per year.
- Class 4 NICs are the main element of self-employed NICs, paid in relation to annual profits above the lower profits limit of £9,568 per year. Same as for employees NIC rate drops to 2% after £50,270 annual income (profits) has been earned.
Comparing the NI classes, the main rate of self-employed NICs is lower than the main employee rate – 9% rather than 12% – and, more importantly in terms of the overall tax burden, there is no equivalent of employer NICs levied on the profits of the self-employed. The total NICs levied on self-employment income are therefore much lower than those on employment income. The government estimates that having lower NICs for the self-employed cost it £5.9 billion in 2019–20. There is no good justification for the preferential NICs treatment of self-employment.
In some circumstances, it is possible to overpay NICs, for example:
- if you have a high income
- if you are both employed and self-employed
- if you have more than one employed job
- if you are self-employed but your profits are under the Small Profits threshold limit
- if you have continued to work after state pension age and have continued to pay NICs
HMRC doesn’t allow you to submit online form and claim overpaid NICs back. However, you can write to HMRC and claim the refund attaching calculation and supporting documents. You need to know specifically what class of NI rebate you are applying for, as there are different methods for reclaiming.
Please feel free to contact us on 0208 249 6000 if you need any help with a rebate or have a question. We offer free 30 minutes consultation for every client.
Written by Irina Stucere.