National Insurance Contributions (NICs): why you need to get it right

National Insurance Contributions (NICs) are an important part of the UK's tax system, funding state benefits and the National Health Service. Although they don’t often dominate the headlines, NICs become newsworthy during general elections, especially when political parties lay out their plans for future contributions.

It is therefore key that employers categorise their workforce correctly, making sure they are paying the correct class of NIC, and understand the impact of any proposed changes.

Understanding NIC classes

Class 1 NIC:
•   Paid by employed workers
•   Employees pay NIC at 8% on earnings above £1,048 per month, which drops to 2% for earnings above     £4,189 per month
•   Employers pay a static rate of 13.8% on employee earnings above £758 per month

Class 4 NIC:
•   Paid by self-employed individuals
•   The rates are lower than those for employed workers, and there is no equivalent employer contribution
•   Paid at 6% on profits between £12,570 and £50,270 and 2% on profits over £50,270

The impact of employee classification
The way workers are classified significantly impacts NIC revenue. HMRC sees a substantial reduction in NIC payments when workers are classified as self-employed rather than employed. Statistics suggest that approximately 23% of workers in Small and Medium Enterprises (SMEs) are self-employed, with 6% of SMEs only engaging with people on a self-employed basis.

The risks of misclassification
When self-employed workers are engaged, the burden falls on the engager to prove that the relationship is genuinely one of self-employment. This is challenging because the definition of an employee for tax purposes is rooted in case law rather than legislation. If HMRC disagrees with the determination, they may pursue the ‘employer’ for both the employee and employer contributions, treating the issue as a failure to deduct the appropriate NIC and PAYE under the payroll system. This can result in significant financial liabilities, including interest and penalties.

Additionally, a re-categorised employee may have claims against the ‘employer’ for unpaid benefits such as holiday pay and pension contributions.

Why accurate categorisation matters
As we have seen, wrongly classifying a worker as self-employed carries significant risks. Given the difference in NIC payable between employed and self-employed statuses, HMRC continue to look carefully at these relationships. Categorising a worker correctly is important to avoid financial repercussions and to stay compliant with tax laws.

In summary, getting NICs right will avoid costly disputes with HMRC and ensure fair treatment of workers thus, staying informed of and compliant with the potentially changing NIC regulations, remains necessary for employers and engagers.

Need help?
If you have questions about HMRC legislation or NICs, please get in touch with your usual contact, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Tessa Brown