National Insurance Contributions

If you live in the United Kingdom you should visit HM Revenue and Customs - we can only deal with queries concerning the Isle of Man.

The impact of the cessation of Contracting Out on National Insurance contributions

National Insurance table letters D, E and L are no longer valid with effect from 6 April 2019.

People on deduction letter D switch to deduction letter A (standard rate), those on deduction letter E switch to deduction letter B (provided they have a valid certificate), those on deduction letter L switch to deduction letter J (provided they have a valid deferment certificate for the tax year).

Using 2018/19 rates as an example a person earning £40,040 (or more) per annum would pay approximately £540 more National Insurance on A rate than on D rate, the employer would pay approximately £1,250 more National Insurance on A rate than on D rate.

General

Most people who work have to pay National Insurance contributions. National insurance is not payable by individuals below age 16 or above State Pension age. State pension ages can be found in downloadable documents on the Retirement Pension web page

National Insurance contributions are payable to the Income Tax Division of the Treasury. See rates and thresholds.

There are four classes of contributions and in the course of a person's working life they may need to change from one class to another or pay more than one class at a time.

The level of a person's contribution and the rules regarding payment depend on the Class of contribution they pay which may be determined by the type of employment they are engaged in.

• Class 1 - Paid by employed earners and their employers
• Class 2 - Paid by self-employed earners
• Class 3 - Paid voluntarily by persons not liable for any other Class of contribution
• Class 4 - Paid in addition to Class 2 contributions by self-employed people whose profits are above certain level (set annually)

Class 1, 2, and 3 contributions count towards entitlement to some social security benefits. Class 4 contributions do not. Class 4 National Insurance is payable via an annual assessment (and possibly a 'payment on account' during the tax year, dependent on profits) and ceases to be payable when the person is over state pension age at the start of the tax year.

Plan to end Class 2 contributions

The Class 2 National Insurance contribution is expected to end on 5th April 2019. This means that the 2018/19 tax year will be the last tax year a person will pay Class 2 National Insurance contributions.

If you are self-employed after that date you will only be liable to pay Class 4 National Insurance contributions if your profits from self-employment exceed the Lower Profits Limit (LPL) set for that year. Class 4 contributions will build entitlement for certain benefits including State Retirement Pension. As Class 2 contributions cease there will be no requirement for persons with low profits to apply for Small Earnings Exemption. The option to pay voluntary Class 3 contributions will be available for people who want to contribute National Insurance to gain qualifying years and entitlement to certain benefits including the State Retirement Pension.

For people who are employed or self-employed abroad, who have been paying voluntary Class 2 contributions, the option to pay voluntary Class 3 contributions will be available for the tax year 2019/20 and onwards.

Share Fisherman and Volunteer Development Worker Class 2 contributions also cease at the end of the 2018/19 tax year. Share fishermen will pay Class 4 contributions as noted above for the self-employed. The option to pay voluntary Class 3 contributions will be available for Volunteer Development Workers for the tax year 2019/20 and onwards.

Earnings factors

For a tax year to qualify for contributory benefit purposes, an insured person must pay sufficient contributions at either the Class 1, 2 or 3 rate to achieve the required Earnings Factor set each year, or to have had earnings from employed earner's employment at least equivalent to the lower earnings limit (LEL) which is set each year, even though contributions have not been paid on those earnings.

An earnings factor is a figure which represents the amount of earnings on which contributions have been paid or treated as paid.

Whilst employed earners actually start paying National Insurance contributions once their earnings exceed the primary earnings threshold set for that tax year if their earnings reach the annual lower earnings limit they are treated as if they had paid contributions at 0% on any earnings they have up to the primary earnings threshold. Earnings on which contributions are paid at that zero rate count towards a person's entitlement to contributory benefits, such as Jobseeker's Allowance or Incapacity Benefit. This protects the National Insurance records of low-paid earners.

Payment of National Insurance Contributions

Employed earners' Class 1 primary contributions are collected by their employer who deducts the appropriate amount from their pay. The employer then pays this to the Income Tax Division of the Treasury.

Deduction amounts have been put into tables for the relevant years for ease of reference, these can be found in Downloadable documents. Table letters refer to the different criteria regarding the person liable to pay, please find these listed below.

• A – Standard rate, not contracted out
• J – Deferred rate, not contracted out (must hold a Certificate of Deferment for the year/employee)
• B – Married Woman's reduced rate (must have a Certificate of Election and women must have been signed up pre-1977)
• C – Over State Pension age – employer only contributions (should hold a Certificate of Age Exception for the employee)
• D – Contracted out (salary related) – usually big employers like government, banks etc
• E – Contracted out, Married Woman's reduced rate (must have a Certificate of Election and women must have been signed up pre-1977)
• L – Contracted out, Deferred rate (must hold a Certificate of Deferment for the year/employee)

N.B. Contracted Out means contracted out of the Additional State Pension, where a person is a member of an approved employer pension scheme. Not Contracted Out means contracted in to the Additional State Pension for contribution purposes. Where employees are 'Contracted Out' we will need to know the Employer Contracted Out Number (ECON) and Scheme Contracted Out Number (SCON) on the end of year return for them (this information should be available from your pension scheme provider). From 6 April 2016 Contracting Out certificates issued by HMRC are no longer valid in the Isle of Man. Should an employer who has had a UK Contracting Out certificate wish to continue Contracting Out in the Isle of Man they should apply to the Social Security Division of the Treasury for the issue of an Isle of Man certificate.

Payments to directors have special rules to prevent manipulation of how they are paid to minimise the liability to National Insurance. Where a person is a director of a company at the beginning of a tax year the earnings period in respect of those earnings is that tax year, whether or not the person remains a director throughout that year. This means in practice that the director's earnings for the year are split equally across the pay periods (usually 12 months) for the year. To calculate the director's National Insurance due there are two methods. Where directors are paid irregularly: each time you pay a director, work out their National Insurance for their total pay over the tax year so far, including bonuses. To work out what contributions they owe, take off the total employee National Insurance they've paid so far this year. For directors who are paid regularly: each time you pay a director, work out their National Insurance only on their pay for that period, including bonuses. In their final pay period at the end of the tax year, split the total annual earnings equally across the year and work out whether more employee National Insurance is due and deduct it from their last payment. Where a director is appointed during the tax year his pay from that pay period to the end of the tax year should be equalised across the pay periods to the end of the tax year.

Where a person has multiple employments, or employment and self-employment, and expects to pay National Insurance contributions on earnings in one employment (for the whole year) at the Upper Earnings Limit (to check the Upper Earnings Limit see the rates and thresholds link above in 'General' information), some National Insurance contributions may be deferred until an end of year review.

See the above downloadable documents for National Insurance forms or the self-employed forms section for Income Tax and National Insurance forms.

Where you are newly self-employed you need to contact us so we can confirm your self-employed status. National Insurance forms relating to self-employment are listed below:

• an application form to pay Class 2 contributions by Direct Debit
• an application form for Small Earnings Exception from payment of self-employed contributions
• an application form for deferment of self-employed contributions
• a form to notify cessation of self-employment

To count for benefit purposes, contributions must be paid within strict time limits. There is also a time penalty if contributions required for a particular benefit claim are late paid, or not paid until the time of that claim. Weekly contribution amounts will rise to the highest contribution rate in force at the time of payment if late paid by one tax year or more regarding Class 2, or two tax years or more regarding Class 3 contributions.

National Insurance Credits

To the extent necessary to make up a qualifying year, National Insurance credits can be awarded to you if you are -

• Claiming Jobseeker's Allowance (Class 1 credit)
• Claiming Incapacity Benefit (Class 1 credit)
• Claiming Maternity Allowance (Class 1 credit)
• Claiming Adoption Allowance (Class 1 credit)
• Claiming Child Benefit for a child under the age of 12 (Class 3 credit)
• Claiming Carer's Allowance (Class 3 credit)
• Claiming Employed Person's Allowance/Disabled worker (Class 1 credit)
• Claiming Employed Person's Allowance/Non-Disabled worker (Class 3 credit)
• A man approaching age 65 - from 6 April 2010, these credits are being phased out in line with the increase in women's State Pension age (Class 1 credit)
• On an approved training course (Class1 credit)
• Required to attend jury service and did not have earnings at or exceeding the Lower Earnings Limit from employed earner's employment (Class 1 credit)
• Approved foster parents (Class 3 credit)
• A person caring for a child under the age of 12 (but not receiving child benefit) who has a certain type of relationship to the child e.g. grandparent, from 6 April 2012 (Class 3 credit)

Class 1 credits count towards the same social security benefits as Class 1 National Insurance contributions and Class 3 credits towards the same social security benefits as Class 3 National Insurance contributions.

Contributory benefits

The Class of National Insurance contributions paid affects the benefits a person may be entitled to.