National Insurance
There are two types of tax on the income you receive as an employee in the United Kingdom – Income Tax and National Insurance. They are calculated using different methods and each has its own set of rules. Here we explain the basics of National Insurance.
What is National Insurance?
National Insurance (NI) in the UK is a deduction from earned income paid by people aged over 16 and under the state pension age. Employers are also required to make contributions. There are various classes of National Insurance Contributions (NICs), paid by employees, employers and the self-employed. Employees of the School will pay Class 1 Contributions. Everybody who pays National Insurance has an NI account and, by payment of NI contributions, accrues rights to certain state benefits, i.e.: Incapacity Benefit Maternity Allowance Widowed Mothers Allowance Widows Pension Jobseekers Allowance Retirement Pension Widows Payment
However, although there is still a link between contributions made and benefit entitlements accrued (particularly the state pension), some benefits do not rely on contributions and some classes of contributions do not accrue entitlements. Therefore in many ways National Insurance now operates as a secondary form of income tax.
National Insurance number
Your National Insurance (NI) Number (NINO) is a number unique to you used as a reference to correctly record NI contributions or credits to your NI account. It is also the reference for all your dealings with HM Revenue and Customs (formerly Inland Revenue) and the Department for Work and Pensions. UK citizens are automatically sent an NI number card just before their 16th birthday. If you have come to the UK from abroad, you are legally obliged to apply for a number and register for NI purposes as soon as you start work here. You should contact your nearest Department for Work and Pensions office and ask for an appointment to be interviewed for an NI number. To find your nearest office, see the DWP website: http://www.dwp.gov.uk/localoffice/
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State Second Pension
National Insurance Contributions are also credited to your State Second Pension, which is a pension you build up in addition to the basic state pension. (The State Second Pension is the replacement for SERPS State Earnings-Related Pension Scheme.) However if you are a member of one of the School’s occupational pension schemes (USS or SAUL), you are “contracted-out” of the State Second Pension and pay a lower rate of National Insurance to partially compensate for the occupational pension contributions you are making.
Class 1 National Insurance contributions
The School pays all employees on a monthly basis. Therefore as an employee you pay Class 1 contributions on any earnings in a particular month where you earn above £420 (the Earnings Threshold – equivalent to £5,035 a year). Contributions are payable at the appropriate rate on earnings between the Earnings Threshold and the Upper Earnings Limit (UEL). The UEL is currently £2,795 per month (equivalent to 33,540 a year). In addition a further 1% is paid on earnings above the UEL. There are various categories of Class 1 Contributions. Most employees pay either: Category A Class 1 NICs - if they are not a member of one of the School's pension schemes (SAUL or USS) and are therefore “contracted-in” to the State Second Pension or Category D Class 1 NICs - if they are a member of SAUL or USS and are therefore “contracted-out” of the State Second Pension.
Over state pension age
If you are over state pension age (currently 65 for men, 60 for women), you do not have to pay employee’s contributions – although the School still pays Category C Employer’s Contributions. The School needs to hold one of the following as evidence of your date of birth and non-liability: Birth certificate or passport (please provide the original and we will take and retain a photocopy) Form CF384 Certificate of Age Exception (we are required to keep the original, but will return this to you as soon as you stop working for the School). If you do not provide evidence of your age, the School is obliged to continue deducting National Insurance from your salary.
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The Government has announced plans for the equalisation of the state pension age. If you are a woman born before 6 April 1950 your state pension age will be 60; if you are a woman born on or after 6 April 1955 your state pension age will be 65; if you are a woman born between 6 April 1950 and 5 April 1955, your state pension age will be between 60 and 65 depending on your exact date of birth.
Reduced rate for married women
A small number of married women have elected to pay reduced rate National Insurance Contributions – either Category B (if “contracted in”) or Category E (if “contracted-out”). However this provision only applies to women married before 11 May 1977, and the entitlement to pay reduced contributions is lost if a woman divorces or, if a widow, remarries, or begins to pay full-rate contributions for some other reason. Also women paying the reduced rate do not accrue entitlement to the state pension in their own right, but rely instead on their husband’s contributions.
Deferment
There are two further categories which apply if you are not liable to pay National Insurance because you are already paying contributions above the Upper Earnings Limit in another job – either Category J (if “contracted in”) or Category L (if “contracted-out”). If you think that this situation applies to you, please contact the Revenue directly. The School can only operate these categories on production of form CA2700.
National Insurance rates
National Insurance rates and thresholds for 2005/06 are: Category Earnings below £420 in a month 0% 0% 0% 0% 0% Earnings Earnings above £2,795 between £420 in a month and £2,795 in a month 11% 1% 4.85% 1% No Employee NICs due 9.4% 1% 1% 1% 1% 1% NIC Rebate on earnings between £364 and £ £420 Not applicable Not applicable 1.6% Not applicable 1.6%
A B or E C D J L
There is a further threshold the Lower Earnings Limit (LEL), currently £364 per month, used in National Insurance calculations. If you earn above the LEL but below the Earnings Threshold (£420 per month), you are not liable to pay any Employee contributions but your NI account is credited as if you had made contributions, and you accrue rights to benefits accordingly. Your payslip will show the NI category which applies to your main employment contract.
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If you have more than one contract with the School and you contribute to an occupational pension under one contract but not the other, National Insurance will be deducted under the appropriate categories for each contract. The School also pays Employers Class 1 contributions for all the above categories, at a rate of 12.8% on all earnings above the Earnings Threshold (£420 per month), except for “contracted out” categories where a 3.5% rebate applies to earnings between the Lower Earnings and Upper Earnings Limits. Note that, unlike income tax, National Insurance contributions are not calculated cumulatively, ie each month’s calculation is made independently. This means, for example, if your earnings are above the Earnings Threshold at the beginning of the tax year, but then fall below it, no refund of contributions is due.
What happens at the end of the tax year
If you are still an employee at the end of a tax year, LSE will send you a P60 by the end of May at the latest, setting out what your taxable earnings in the tax year were and how much tax and national insurance you have paid.
Paid leave for parents
Your eligibility for Statutory Maternity Pay, Statutory Paternity Pay and Statutory Adoption Pay is also, in part, linked to National Insurance contributions. In most cases staff will also be entitled to School’s occupational schemes, which pay either 100% or 50% of full pay for some periods. Further details about paid and unpaid leave for parents can be obtained from the Employee Relations team.
http://www.lse.ac.uk/collections/employeeRelations/
When to contact Human Resources
Please • • • contact the Human Resources Division if: you have any basic queries about income tax or National Insurance you have a query about form P60 if you think we are deducting National Insurance contributions incorrectly
You can contact us on hr.pay.info@lse.ac.uk or see the Human Resources website on www.lse.ac.uk/collections/humanResources/ for a list of contacts.
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Contacting HM Revenue and Customs
Each employer in the UK is allocated to a specific tax office. When you change your main job, your tax records will be transferred from one tax office to another. The contact details for the LSE’s tax office are as follows: HM Inspector of Taxes North East Metropolitan Area Fountain Court 119 Grange Road Middlesbrough TS1 2AX Telephone: 0845 302 1414 When you contact the Revenue, you will need to quote the LSE's Tax Reference 120/L40364 and your National Insurance number.
Further information
We have only been able to give basic information here and the above should not be regarded as a comprehensive statement of law. More detailed information can be found at the HM Revenue and Customs website: http://www.hmrc.gov.uk/ Further information about state pensions can be found at the following websites: www.dwp.gov.uk www.pensionguide.gov.uk
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