National Insurance Contributions (NICs) are hardly the most exciting subject. But all pay as you earn (PAYE) employees aged between 16 and state retirement age currently 60 for a woman and 65 for a man – must pay them if they earn more than the primary threshold (£105 a week). Contributions are then paid at the full rate on all earnings up to the “upper earnings limit” (£770 a week). Sick and holiday pay is included.
NICS are effectively an extra tax. While how much you have paid over a working life has some bearing on your entitlement to a state pension, your payments are in no way actually set aside for your pension. Instead, they just pop into the general pool of money currently being mismanaged by Alistair Darling – less likely to be funding our paltry state pensions than already loaned to Northern Rock. And you can’t opt out.
So how much do you pay? There are various classes of NICS. Employees pay primary Class 1 contributions, while the self-employed are liable for Class 2 and Class 4 contributions, even though the latter don’t count towards benefits. If you are both, you could end up having to fork out on more than one class.
The basic NI rate for employees paying primary Class 1 contributions is 11%, with a 1.6% rebate if you choose to give up the benefits of the State Second Pension (S2P, formerly known as SERPS). The bottom line is that if you are ‘contracted in’, like most employees, for the tax year that started on 6 April 2008, you’ll pay 11% on all your monthly remuneration between £453 and £3,337 (the latter equates to just over £40,000 per annum), ie up to a maximum of £317. You then pay 1p on each additional pound you earn.
Add that on to your basic tax bill and everyone in work is effectively paying a minimum income tax of 31%. And just to ensure the pain is shared, your employer also has to shell out Class 1A or 1B – which adds up to another 12.8% – on your behalf.