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Employer's National Insurance contributions

Employer's National Insurance contributionsEmployers pay National Insurance contributions on their employees' earnings and benefits. They are also responsible for collecting employees’ Class 1 National Insurance contributions and income tax deductions through the PAYE system.

Employer's Class 1 National Insurance

Employers pay ‘secondary’ Class 1 National Insurance contributions on their employees’ earnings. 'Primary' Class 1 National Insurance contributions are an employee National Insurance contribution (also collected through PAYE).

The amount of Class 1 National Insurance payable depends on employees’ earnings and National Insurance category letter. The standard rate of employer's Class 1 National Insurance is 13.8% and is now applicable to employees that had previously opted out of the state second pension. It is no longer possible for employees to opt out of the state second pension and the NI rebate has been removed for those employees.

Employers can benefit from the employment allowance which reduces the amount of employer NICs payable up to the allowance limit (£3,000 per year from April 2016).

NI Rates:

  • Employers pay Class 1 National Insurance contributions of 13.8% on all earnings above the secondary threshold (£156) for almost all employees.
  • Employers pay Class 1 National Insurance contributions of 0% on earnings between the secondary threshold (£156 in 2016/14) and the upper secondary threshold (£827) for employees aged under 21.
  • Employers pay Class 1 National Insurance contributions of 0% on earnings up to the upper secondary threshold (£827) for apprentices aged under 25 completing a statutory apprenticeship.
  • There is no longer a rebate of employer’s National Insurance contributions for employees in a personal or stakeholder pension scheme.

Employer's National Insurance contributions — benefits

Employer's National Insurance contributions are also payable on some employee benefits. The way these contributions are handled depends on the specific benefits being provided:

  • Class 1 National Insurance contributions may be collected in the normal way through PAYE. Tax may or may not be deducted as well, depending on the benefit.
  • You may need to report the benefits at the end of the year. Class 1A National Insurance contributions may or may not be payable on the value of the benefit. Again, this depends on the benefits in question.

The detailed treatment of employer's National Insurance contributions is complicated. Most employers use payroll software or a payroll service to handle this.

Note: the PAYE system has changed. Almost all businesses are required to report PAYE information in real time.

Simplifying employer's National Insurance contributions

Dispensations to cover employee expenses and benefits were abolished on 6 April 2016. Employees can no longer claim a deduction for expenses reimbursed by employers. Instead, reimbursed expenses are treated as exempt from tax and NICs (providing they are costs that have actually been incurred by the employee). For example, expenses incurred for work-related travel and subsistence, subscriptions and fees or business entertainment expenses. Such expenses are also exempt from HMRC reporting requirements.

Where the expense or benefit is not allowable, or is provided under a salary sacrifice scheme, it must be reported to HMRC on form P11D.

To simplify reporting, employers can now use 'scale rates' or flat rates to reimburse employees instead of the actual costs incurred. Scale rates include rates such as HMRC-approved fuel advisory rates and rates agreed in writing by HMRC. You can apply for a bespoke scale rate approval notice for expenses and benefits on the GOV.UK website.

Expenses and benefits reimbursed using approved scale rates do not need to be reported to HMRC. Approval notices must be renewed every five years.

Dispensations agreed with HMRC between April 2011 and April 2016 can be imported to an approval notice. Dispensations agreed prior to this date will require a new application if the employer wishes to obtain an approval notice.

There is also an exemption for certain 'trivial benefits' costing less than £50 each, subject to an annual limit of £300 per employee per year. Separately, employer's National Insurance contributions can be simplified by negotiating a payroll settlement agreement with HMRC.

A settlement agreement can cover expenses and benefits which are minor, irregular or which are difficult to handle through PAYE (for example, where employees share a benefit). Some items such as cash payments or regular large benefits cannot be included.

Once you have agreed a payroll settlement agreement, you can make a single Class 1B employer National Insurance contribution based on the total value of all the benefits covered by the agreement and the tax due on them.

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