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ACCA Applied Skills · Taxation (UK) · The comprehensive computation of taxable income and income tax liability

Hannah is employed on a salary of £50,000. She pays £4,000 a year into her employer's occupational pension scheme, which operates a net pay arrangement, so the £4,000 is deducted from her pay before income tax. Her employee Class 1 national insurance contributions for the year are:

Her employee Class 1 NIC is £2,994.40. Occupational pension contributions under a net pay arrangement reduce income tax only, not NIC. NIC is therefore charged at 8% on earnings between £12,570 and £50,000 of £37,430.

  1. A£2,994.40Correct
  2. B£2,674.40
  3. C£4,000
  4. D£3,680

Explanation

Net pay arrangements give relief for income tax only, so NIC is still calculated on the full salary of £50,000. The calculation is (£50,000 − £12,570) × 8% = £2,994.40. £2,674.40 wrongly reduces earnings by the pension contribution. £3,680 applies 8% to £46,000 with no threshold.

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