27 Oct 2020
As an employer, paying national insurance contributions, including employer’s NICs, involves navigating a complex web of rules, rates and thresholds. Accounting software can provide significant help, but you still need a good understanding of the national insurance framework. This article will help guide you safely through the employer’s national insurance maze and make sure you understand the system and pay the right amounts.
An employee’s national insurance payments comprise two elements. The first (class 1) are contributions deducted from their pay by you, the employer. The second (class 1A or 1B) are payments that you must make directly, as the employer. The latter is known as employer’s national insurance.
The other classes of NICs (2 to 4) are for the self-employed and voluntary contributions that employees make to top up benefits.
Companies also pay employer’s national insurance on directors’ salaries. This applies even if you are the director of your own company running payroll and are the only employee.
NIC earnings thresholds can be calculated weekly or monthly. There are various limits governing what employees pay, but the main threshold for employers is £732 (£169 a week) - once your staff earn above that, you must start paying employer’s national insurance for them.
There is a different threshold for workers under the age of 21 – for them, employers pay zero NICs up to £4,167. Employers of certain apprentices under 25 years old also pay zero NICs up to £4,167.
The rate of NICs that employers contribute depends on the national insurance category letter of the employee.
Most employees are in category A and, for them, employers pay 13.8% on earnings above £732 a month.
Employers pay the same rate for all other categories except H, M and Z, for which you pay zero up to £4,167 a month; then 13.8% for amounts above that.
You should include each employees’ category letter on their payslips and use category letter X for employees who do not have to pay national insurance, for example, because they are under 16.
The employment allowance aims to encourage recruitment by allowing eligible employers to cut their annual national insurance liability by up to £4,000.
With the allowance, you pay less employer’s national insurance each time you run your payroll until the £4,000 has gone or the tax year ends, whichever comes sooner.
You can claim employment allowance if you are a business or charity - including community amateur sports clubs - and your employer’s class 1 national insurance liabilities were less than £100,000 in the previous tax year.
Furthermore, you can claim employment allowance for the previous four tax years dating back to 2016 /17 tax year. Some of the rules for claiming are different in previous years.
Because the aim is to encourage recruitment, companies with only one employee cannot claim this allowance if that employee is also a director of the company.
You are also unable to claim the allowance for certain categories of employees. These include any contractors you employ whose earnings are within IR35 off-payroll working rules and anyone you personally employ for domestic work, such as a nanny or gardener (unless they’re care or support workers).
As an employer, you must pay national insurance on any expenses and benefits you give your employees. You must also pay NICs on some other lump sum payments, such as for redundancy. The rate you pay on benefits for 2020/21 is 13.8%, the same as for other earnings.
HMRC supplies this easy to use calculator to work out how much you should pay in employer’s and employee’s NICs. Your payroll or accounting software should also make these calculations for you and doing it this way is likely to be even more efficient.
Good software can make sure you only input the figures once, and automatically submit the relevant information directly to HMRC in real time. It can also generate a payroll report detailing who has been paid, how much they have received and how much employer’s national insurance is due to HMRC.