How Is National Insurance Calculated?

Part 1: Employees NI

When I started writing a blog post on National Insurance (NI) I initially addressed both employees and employers NI together. The further I got into the subject the more I realised employees and employers NI would work better split into two posts. This week we are going to look at employees NI, with part 2 coming next week when we look at employers NI.

What is the purpose of employees NI?

Before we look at how employees NI is calculated it’s worth understanding the purposes of NI.

What is National Insurance used for:

  • Basic State Pension
  • Additional State Pension
  • New State Pension
  • Contribution-based Jobseeker’s Allowance
  • Contribution-based Employment and Support Allowance
  • Maternity Allowance
  • Bereavement Support Payment

Who pays National Insurance?

If you are aged between 16 and SPA (State Pension age) you must pay NI if you are either:

  • An employee earning above £184/wk or £797/mth
  • Self-employed and making a profit of £6,515 or more a year

Even if you don’t pay employees NI because you don’t earn enough, if you do earn between £520 and £797/mth your contributions are treated as having been paid to protect your NI. This is because your earnings are within the Lower Earnings Level (LEL).

How much NI do you pay?

The amount of employees NI payable depends on your earnings and NI category letter. The majority of people will be category A, but this won’t always be the case. Below is a table which shows the different categories and percentages dependent on earnings.

Category letter£120 to £184 (£520 to £797 a month)£184.01 to £967 (£797.01 to £4,189 a month)Over £967 a week (£4,189 a month)
A0%12%2%
B0%5.85%2%
CN/AN/AN/A
H0%12%2%
J0%2%2%
M0%12%2%
Z0%2%2%
Source: HMRC

The National Insurance category you belong to will be displayed on your payslip. The table below outlines the different categories.  

Category letterEmployee group
AAll employees apart from those in groups B, C, J, H, M and Z in this table
BMarried women and widows entitled to pay reduced National Insurance
CEmployees over the State Pension age
JEmployees who can defer National Insurance because they’re already paying it in another job
HApprentice under 25
MEmployees under 21
ZEmployees under 21 who can defer National Insurance because they’re already paying it in another job
Source: HMRC

Your earnings in the pay period will be the final part in determining how much NI you pay. The table below outlines the different monthly thresholds. HMRC also has a weekly thresholds table.

21/22 Employee NI Monthly Thresholds

Earnings per month2021/2022 tax year
Lower Earnings Limit (LEL)
Employees do not pay National Insurance
but get the benefits of paying
£520
Primary Threshold (PT)
Employees start paying National Insurance
£797
Upper Accrual Point (UAP)
Employees with a contracted-out pension pay
a lower rate of National Insurance up to this point
N/A
Upper Earnings Limit (UEL)
All employees pay a lower rate of National Insurance
above this point
£4,189
Source: HMRC

Employee NI Calculation Examples

Using everything we have learnt so far it’s now time to work through a few examples. As category A is the most common NI category, I have used this for all three examples below. The same figures below would be applicable for category letters H & M as well due to the percentage rates being the same.

Example 1

Employee earning £1,000/mth

Using the monthly thresholds table above, earnings between £797/mth (Primary Threshold) – £4,189/mth (Upper Earnings Limit) are calculated at 12%, so the calculation is,

1,000 – 797 = £203 NI’able pay

12% of 203 = £24.36 employees NI

Example 2

Employee earning £4,500/mth

An employee earning £4,500/mth is spanning several NI thresholds, LEL to UEL. When we do the calculations, we need to determine the amount of earnings in each band.

LEL 0 – 797 = £797 @ 0% = £0 NI

PT – UEL 797 – 4,189 = £3,392 @ 12% = £407.04

UEL and above £4,189 to £4,500 = £311 @ 2% = 6.22

Total employees NI = £413.26

Example 3

Employee earning £600/mth

No employees NI would be due. This is because the employee is below the Primary Threshold of £797/mth. Nevertheless, as the employee is earning between £520 and £797/mth this falls within the Lower Earnings Limit which means the employee contributions are treated as having been paid to protect their NI.

What happens if you have more than one job?

As NI is calculated on a job-by-job basis, each job will be handled separately for NI purposes. This is different to income tax which is based on all earnings.

How is NI calculated if you are a director?

There are two methods of calculation for directors:

  • Standard, National Insurance is calculated on a year-to-date basis. The director doesn’t start paying NI until they breach the annual Primary Threshold (£9,568).
  • Alternative, National Insurance is calculated on pay for that period. When the last payroll of the tax year is processed there needs to be a calculation of NI for the tax year to see if more NI is due, which then needs deducting from the director’s final payment.

Summary

I hope this post has provided you with the tools to calculate your own NI, and more importantly to understand how the employees NI on your payslip is achieved each pay period.

Next week we will post the second part of the two part series on National Insurance, How Is National Insurance Calculated Part 2: Employers NI

What is re-enrolment?!

If you are reading this post, you are probably one of the many employers who have been receiving letters from The Pensions Regulator regarding re-enrolment. We certainly have received many emails from our clients asking, “what is re-enrolment?!”

Re-enrolment is part of an employer’s workplace pension duties which must be completed once every three years on or around the 3rd anniversary of the companies staging date.

Once you have selected your re-enrolment date within the 6-month time-frame (three months either side of your third anniversary staging date) you have two duties to complete. Firstly, during the usual assessment of employees during the payroll process any employees who have opted out previously, but are eligible on the chosen re-enrolment date, will have to be re-enrolled into a qualifying workplace pension scheme. If the employee has opted out within the last year, they are exempt from having to be re-enrolled. It’s worth noting once the employee has bene re-enrolled, they are allowed to out opt again as they had done previously.

If an employee is due to leave employment before the re-enrolment process has bene completed the employer can choose whether to re-enrol the employee or not.

If you are unsure of your re-enrolment dates The Pensions Regulator has a handy tool. Clicking here will take you to the tool.

The second part of your re-enrolment duties is to complete a re-declaration of compliance with The Pensions Regulator. All employers, whether they have had to re-enrol employees, have to do this within 5 months of the third anniversary of their staging date. Failing to file the re-declaration of compliance before the deadline can result in fines from The Pensions Regulator so it’s worth making sure you are compliant.

To file your re-declaration of compliance please click here!

Please feel free to get in touch if you have any further questions about re-enrolment, or anything to do with workplace pensions and payroll.

10 questions new employers have about payroll!

1. What is a PAYE scheme and do I need to operate one?

PAYE stands for Pay As You Earn, which simply means tax is calculated and deducted from earnings when the earnings are paid. Most employers will have to operate a PAYE scheme, whether this is done themselves or handled by outsourcing to a payroll bureau.

If you pay yourself or any employees below the Lower Earnings Limit (LEL) (£512/mth tax year 19/20) you don’t need to operate a PAYE scheme provided no employees have another job or receive a pension.

In the scenario where you’re operating a PAYE scheme and you then take on an employee whose gross pay is below the LEL then they will need to be included in the PAYE scheme.

2. Checking the employee has the right to work?

It’s important you check a job applicant’s right to work in the UK before you employ them. This can be done by either checking the applicant’s original documents or check the applicant’s right to work online if they give you their share code.

Please visit www.gov.uk/check-job-applicant-right-to-work to help you carry out the necessary checks.

3. What is the National Minimum Wage and National Living Wage?

Nearly all workers are entitled to the National Minimum Wage and if the worker is 25 or over they will be entitled to the National Living Wage. The rate received depends on the age of the worker and whether they are an apprentice. The National Minimum/Living Wage is based on the hourly rate a worker is paid.

You’re not entitled to the National Minimum/Living Wage if you are a director or self-employed.

The current rates are as follows;

Year25 and over21 to 2418 to 20Under 18Apprentice
April 2019£8.21£7.70£6.15£4.35£3.90

4. What is auto enrolment?

Since the introduction of workplace pensions all employers must automatically enrol all eligible employees into a qualifying pension scheme like NEST and offer a workplace pension scheme to those employees who do not qualify for automatic enrolment.

Auto enrolment is a very large subject, and one which can’t be ignored because The Pensions Regulator isn’t slow in handing out penalties to employers who don’t comply.

Essentially auto enrolment can be broken down into three parts;

  • Provide a pension letter to employees within 6 weeks of their start date
  • Assess employees and enrol any eligible employees automatically
  • File a declaration of compliance with The Pensions Regulator

Once these initial tasks are complete employees need to be assessed each pay period and the necessary action taken depending on their status.

We handle pension set up and administration for NEST, The People’s Pension & NOW Pensions. If you use a different pension scheme please let us know as we might be able to help.

For further reading it’s worth going to www.thepensionsregulator.gov.uk/en/employers

5. Who pays the employee?

We perform the calculations based on the earnings you supply, provide you with payslips, a payroll summary report, a P32 report (taxes due to HMRC) and perform the pension administration. You pay the employee(s) net earnings and the employer and employee taxes to HMRC based on the figures we provide.

6. How do I pay tax to HMRC and when?

The easiest way to pay HMRC is to use internet banking. The payee details are;

Account name: HMRC Cumbernauld

A/C no: 12001039

Sort code: 08 32 10

Reference Example: 123AB12345678 plus a 4 digit suffix

The reference always starts with your Accounts Office Reference, which identifies your payroll so HMRC know which payroll scheme to allocate the payment to. Although it’s not mandatory it’s a good idea to add the 4 digit suffix to the Accounts Office Reference when you make a payment because this identifies the tax period you are paying. The first 2 digits identify the tax year and for tax year 2019-20 the first 2 digits are 20. The last 2 digits identify the tax month where April 2019 is tax month 1 so the last 2 digits are 01, May is 02 and so on. So for example the taxes for December 19 (tax month 9) is 2009.

The payment deadline is 22nd of the month after the tax month end. So the tax month end for December is 5th January so the deadline to pay the taxes is 22nd January.

7. What is the pay period and earnings period?

The pay period and earnings period are important to set out from the start of the payroll. The pay period is when you pay your employees, e.g. if you pay your employees weekly than the earnings period is weekly, if you pay employees monthly than the pay period is monthly and so on. Employees must receive a payslip every time they are paid and must receive a payslip by law on their pay day or shortly before, but not after.

The earnings period relates to when the money was earnt, this is particularly important if an employee is paid for variable hours worked. If for example we have an employee paid monthly on the last day of the month and works variable hours, you would want to have an earnings period that gives you time to collate the information, process the payroll and get the employee(s) paid. You may have an earnings period of the 25th-24th each month, therefore any hours worked between those dates will be paid on the last day of the month.

8. What information do you need from an employee to set them up on the payroll?

To be able to set an employee up on the payroll we would require;

  • Name
  • Address
  • NI number
  • DOB
  • Start date
  • P45 or complete a starter checklist form which can be found online at HMRC

9. Does every employee need to receive a payslip?

Yes, simply every worker paid must be given a payslip no later than the day they are paid. If an employee works variable hours the payslip needs to show the hours worked. The employee needs to be able to understand the amount they’ve been paid and how that relates to the work they’ve completed.

10. What is the NI Employment Allowance?

If entitled to the NI Employment Allowance the first £3,000 of employers NI (Class 1) is waived. Entitlement depends on several criteria, the main one being the company employees a non-director who earns above the secondary threshold. If you are a single director company, you will not be eligible to the NI Employment Allowance. There are further criteria for a company to be entitled, please see the link below for further reading;

www.gov.uk/claim-employment-allowance

If the company is eligible during the tax year, you will be able to claim up to the full £3,000 Employment Allowance. Furthermore, if you become no longer eligible during the tax year, you can continue to claim for the remainder of the tax year and then turn off the eligibility from the start of the following tax year.

There are further changes coming in from April 2020. Employers with a total secondary NIC bill over £100,000 (this is from the previous tax year) will no longer be able to claim the NI Employment Allowance.

The NI Employment Allowance will have to be claimed each year by submitting an RTI.

NI Employment Allowance will operate under the de minimis State Aid.