National insurance contributions are payments based on the level of earnings of employed and self employed persons. They help to fund the UK social security system. The National Insurance Contributions Office (NICO) collects contributions from employed and self employed persons. How much a person pays and the system for collecting it depends on the "class" of contribution paid. Social Security Benefits are dealt with by the Department for Work and Pensions (DWP). The legislation is in the Social Security Contributions and Benefits Act 1992 and statutory instruments.
Unless "contracted out" (see below), employees and employers pay Class 1 contributions under the State Second Pension Scheme (S2P) which replaced the State Earnings Related Pension Scheme (SERPS) from 06 April 2002. The contributions are based on a percentage of gross earnings. Payments made by employees are called primary contributions, those made by employers secondary contributions. Certain employees and their employers are exempted from payment of Class 1 contributions. They are [note 1] :
(a) people aged under 16 or over state pension age,
(b) people whose earnings are below the weekly lower earnings limit,
(c) returning and counting officers and people employed by them in connection with an election or referendum, and
(d) certain employees of international organisations and visiting armed forces.
An additional category of contributions, class 1A, is paid by employers on the provision of benefits in kind, such as cars and private fuel to "P11D" employees (all directors, and employees earning £8500 per annum or more inclusive of benefits.) Class 1 and 1A contributions are collected through the PAYE system.
Employees who are members of occupational pension schemes may be "contracted out" of SERPS/S2P by their employers if they operate a salary related scheme or a money purchase scheme. Contracted out employees are still eligible for the basic state pension but obtain their additional pension from their employer’s scheme. Contracted out employers and their employees pay reduced rates of Class 1 (but not Class 1A) contributions on earnings.
Until 6 April 2012, employees could also contract out of SERPS/S2P by entering into personal pension arrangements, to which their employers may or may not have contributed. In these cases both employer and employee continued to pay full national insurance contributions, but the contracting out rebate was paid by the DWP into the personal pension scheme. Employees can continue to contract out of SERPS for certain pensions, including a final salary scheme.
HMRC Insolvency Claims Handling Unit is responsible for calculating Class 1 debts and submitting proofs of debt in any insolvency proceeding, see paragraph 77.73. A list of contacts for the ICHU is available in Appendix A of the Partnership Agreement on the ORBS intranet site.
Class 2 and Class 4 contributions are paid by self employed persons. Class 2 contributions are payable at a flat weekly rate and entitle the contributor to all contributory benefits except contribution based jobseekers allowance and the earnings related supplement to retirement pension. People who become self employed must notify NICO and make arrangements to pay their Class 2 contributions. Payment can be made by monthly direct debit or quarterly in arrear. Those who pay quarterly receive a bill from NICO showing the amount owed.
Class 4 contributions are payable at a fixed percentage on profits from a trade or profession charged to income tax under self assessment; they carry no entitlement to benefits of any kind. The contributions are collected by NICO. The provisional half yearly payments made on 31 January and 31 July under self assessment include Class 4 contributions based on the previous year's figures with any balancing adjustment made in the return on the following 31 January. If Class 4 contributions are paid late, interest is charged. Amounts owed by an insolvent in respect of unpaid Class 4 contributions are included in the proof(s) of debt submitted by HMRC Insolvency Claims Handling Unit.
Class 3 contributions are a voluntary payment that may be made by those who would otherwise make insufficient contributions to earn a full basic state pension on retirement. They are paid at a flat weekly rate.
State benefits that are linked to National Insurance contributions are known as 'contributory benefits'.
National Insurance contributions count towards the following state benefits:
(a) The basic state pension.
(b) The additional state pension, sometimes called the State Second Pension.
(c) Jobseeker's Allowance - the 'contribution-based' element.
(d) Employment and Support Allowance - the 'contribution-based' element.
(e) Maternity Allowance.
(f) Bereavement benefits - Bereavement Allowance, Bereavement Payment and Widowed Parent's Allowance.
(g) Incapacity Benefit.
See the Jobcentre Plus website, for more information about each of the above benefits, including how to claim.
If an individual is not paying National Insurance contributions because, for example, he/she can't work due to illness or is caring for someone, he/she may be able to get National Insurance credits. National Insurance credits can help protect an entitlement to the basic state pension and certain other benefits.
For more information see http://www.hmrc.gov.uk/ni/intro/credits.htm
There could be a gap in National Insurance contributions for various reasons, for example:
If the state pension age is reached on or after 6 April 2010, only 30 qualifying years are needed for entitlement to a full basic state pension.
If the state pension age is reached before 6 April 2010 the number of qualifying years needed for entitlement to a full basic state pension is normally 44 for men, or 39 for women.
If a bankrupt is concerned that failure to pay his/her National Insurance contributions due to bankruptcy will effect his/her entitlement to the state pension (or other contributory benefit), he/she should be directed to the HMRC website for more information on topping up National Insurance contributions. This also includes guidance on how to check his/her National Insurance contributions record.
If an individual doesn’t have the full number of qualifying years at state pension age, the amount received will depend on the date that state pension age was reached, and the number of qualifying years built up.
More information on how many years someone has to date, and how much state pension he/she may have built up, can be obtained by following this link - http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/DG_184319
Notification of the winding up or bankruptcy order is sent to HMRC ICHU. Data on new cases is automatically extracted from ISCIS and sent to the ICHU. It is very important that the official receiver enters the case details onto ISCIS as quickly and as accurately as possible. It is not necessary to send a paper copy of the information, see paragraph 77.72. See also Chapter 3 Part 7 - Initial procedure when winding up order made and Chapter 4 Part 8 - Initial procedure when bankruptcy order made.