ACCA Applied Skills · Taxation (UK)

National Insurance Contributions for Employed and Self-Employed Persons

National insurance contributions are payments on earnings and profits. Employees pay Class 1 at 8% between £12,571 and £50,270, then 2% above. Employers pay Class 1 at 15% above £5,000 and Class 1A at 15% on taxable benefits. The self-employed pay Class 4 at 6% and 2% on profits above £12,570.

What this chapter covers

This chapter covers the national insurance contributions (NIC) that arise from employment and self-employment. You need to know who pays each class, what it is charged on, and which rates and thresholds apply. ACCA gives the rates in the tax tables in the exam, so your job is to apply them to the right figure.

The classes split into two groups. Class 1 employee and Class 1 employer are charged on earnings. Class 1A is charged on the employer when employees receive taxable benefits. Class 4 is charged on the profits of the self-employed. The comparison of employed and self-employed NIC pulls these together. The TX-UK tables for this session give no Class 2 rate, so you do not calculate Class 2.

Two short examples show the method. An employee earning £30,000 pays Class 1 of (£30,000 − £12,570) × 8% = £17,430 × 8% = £1,394.40. The employer pays (£30,000 − £5,000) × 15% = £25,000 × 15% = £3,750, before any employment allowance. A sole trader with taxable trading profits of £60,000 pays Class 4 of (£50,270 − £12,570) × 6% = £37,700 × 6% = £2,262 plus (£60,000 − £50,270) × 2% = £9,730 × 2% = £194.60. The total is £2,456.60. The £37,700 is the width of the Class 4 6% band. It is not the income tax basic rate band, even though the figure is the same.

This chapter links to several others. Benefits in kind and car benefits from the employment income chapter drive the Class 1A calculation. Adjusted trading profit from the sole trader chapters drives Class 4. NIC also appears in advice questions, where you compare the cost of employing someone with using a self-employed contractor.

NIC is a small, predictable topic with rules that are easy to apply once learned, so it is a good place to secure marks. It appears in objective test questions, where a single wrong rate or band loses the whole answer. It also appears inside longer constructed response questions on employment income and sole traders. Because the thresholds are given in the exam, marks go to students who choose the right class and the right base figure. Careful practice here pays back across the whole paper.

National insurance contributions for employed and self-employed persons: topics in the order to study them

1Class 1 Employee NICStart with the basic idea of a band-based charge on earnings: nil up to £12,570, 8% to £50,270, then 2%.
2Class 1 Employer NIC and Employment AllowanceIt uses the same earnings but a different threshold (£5,000) and rate (15%), so learn it straight after the employee version to avoid mixing them up.
3Class 1A NIC on Taxable BenefitsIt builds on Class 1 employer and links to the benefits and car benefit work, so it needs the earlier rate in place.
4Class 4 NIC for the Self-EmployedOnce the employee classes are clear, move to profits-based NIC. The bands match the employee bands but the main rate is 6%.
5Employed vs Self-Employed NIC ComparisonThis comes last because it needs every earlier class to compare the total NIC cost of the two routes.

How to prepare National insurance contributions for employed and self-employed persons

Learn the rates once, then spend most of your time on choosing the right class and base figure. Practise on your phone in short sessions with a one-line check after each question.

Write the NIC table from memory: Class 1 employee, Class 1 employer, Class 1A and Class 4, with each threshold and rate. Check it against the exam tax tables.
For each class, say in one sentence who pays it and what it is charged on. For example, Class 1A is paid by the employer on taxable benefits only.
Work Class 1 employee and employer on the same salary. Calculate each band separately and add them. Do not apply 8% to the whole salary.
Do Class 1A questions that start from a car benefit or other benefit calculation. Work out the taxable benefit first, then apply 15%.
Do Class 4 questions that start from adjusted trading profit. Check that you have used the profit after adjustments and capital allowances before applying the bands.
Finish with comparison questions: total NIC and tax cost of an employee against a self-employed contractor. Lay out each party's cost under its own heading.
Do timed objective test questions on mixed classes. Note why each wrong answer was wrong, and repeat any you got wrong a few days later.

Common mistakes in National insurance contributions for employed and self-employed persons

Applying 8% or 15% to the whole amount of earnings instead of only the part above the threshold.
Fix: Always subtract the threshold first. Write the band limits above your working, then multiply each slice by its rate.
Using the employee threshold of £12,570 for the employer's Class 1.
Fix: Remember that the employer pays nil only up to £5,000. Write 'employer 5,000' beside every employer calculation.
Charging Class 1A on salary or on the employee.
Fix: Ask two questions before you start: who pays, and on what? Class 1A is paid by the employer on taxable benefits at 15%.
Using the wrong profit figure for Class 4, such as accounting profit or drawings.
Fix: Use adjusted trading profit after capital allowances, as ACCA treats it. Label the figure clearly before you apply the bands.
Forgetting the employment allowance or applying it to the wrong NIC.
Fix: Deduct it, up to £10,500, from the employer's Class 1 secondary and Class 1A liabilities, and only when the question says the employer is eligible. Never set it against employee Class 1 or Class 4.
Leaving out employer NIC when comparing the cost of an employee with a self-employed contractor.
Fix: List each party's costs separately. Show the employer's Class 1 as a cost of employing, then compare the totals.

Last-day revision: National insurance contributions for employed and self-employed persons

Class 1 employee: nil on £1 to £12,570, 8% on £12,571 to £50,270, 2% above £50,270.
Class 1 employer: nil on £1 to £5,000, then 15% on everything above £5,000.
Employment allowance is £10,500. Set it against the employer's Class 1 secondary and Class 1A liabilities, where the employer is eligible. Never set it against employee Class 1 or Class 4. Use it only when the question says the employer is eligible.
Class 1A is 15% and is paid by the employer on taxable benefits.
Class 1A is charged on the benefit amounts, not on salary.
Class 4: nil on £1 to £12,570, 6% on £12,571 to £50,270, 2% above £50,270.
Class 4 is based on taxable trading profits, not on drawings.
Calculate each NIC band separately and add the results.
The employee and Class 4 thresholds are £12,570 and £50,270. The employer threshold is £5,000.
The TX-UK tables for this session give no Class 2 rate, so you do not calculate Class 2.
In an employed versus self-employed comparison, include the employer's NIC as a cost of the employee.

National insurance contributions for employed and self-employed persons practice questions

National insurance contributions for employed and self-employed persons in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Strategic ProfessionalNational insurance contributions for employed and self-employed persons

National insurance contributions for employed and self-employed persons: frequently asked questions

What are the main classes of NIC in TX-UK?

You need Class 1 employee, Class 1 employer, Class 1A and Class 4. Class 1 is on earnings, Class 1A is on taxable benefits paid by the employer, and Class 4 is on self-employed profits. The TX-UK tables for this session give no Class 2 rate, so you do not calculate Class 2.

Do I need to memorise NIC rates for the exam?

The rates and thresholds are provided in the ACCA tax tables, so you do not need to memorise them. You do need to know which rate belongs to which class and how to apply it. Learning the layout of the table saves time in the exam.

How is Class 4 NIC calculated?

Take taxable trading profits and charge nothing on the first £12,570. Charge 6% on profits from £12,571 to £50,270, then 2% on profits above £50,270. For profits of £60,000 the result is (£50,270 − £12,570) × 6% = £2,262 plus £194.60, which is £2,456.60.

Who pays Class 1A NIC and on what?

The employer pays Class 1A, at 15%, on taxable benefits provided to employees. It is not deducted from the employee. In questions it normally follows a calculation of a car benefit or another benefit.