National Insurance 2003/04

Beating the NIC rises

Both employers and employees are now paying more over to the Government in the shape of increased National Insurance Contributions (NICs) which came into effect from this month. From the employers’ point of view it will cost them 1% more to pay their employees the same. From the employees’ point of view they face a 1% cut in pay.

Over the next year there may well be a renewed increase in executive and employee share plans. In many cases such schemes are entirely exempt from NICs.

Clearly share schemes are never going to be suitable for all employers and will never replace salary, but it may well be worth examining whether a share based incentive scheme can be offered and built into the remuneration package.

There are two types of scheme – the Share Incentive Plan (SIP) and the Enterprise Management Incentive (EMI).

Share Incentive Plan

A SIP is clearly not suitable for every company but it does allow employees to buy shares out of their pre-tax and crucially their pre NIC–salary.

Enterprise Management Incentive

Under EMI, options can be granted to key executives or all staff if you fall within certain value limits and the employees avoid income tax and NICs both when they receive the option and when they ‘exercise’ or acquire the shares. The employees pay tax when they sell the shares.

Clearly expert advice is needed to ensure your company can take advantage of these schemes and you have to be clear about all of the implications. Such schemes should not be used solely to save some tax but they are worth thinking about.

Deferment

Those with two jobs can apply to defer NIC due on the second employment or self-employment. However deferment of NIC does not cover the additional 1% due from 6 April 2003.

For a second employment where deferment has been granted Class 1 NIC must still be paid by the employee at 1% on all earnings over £89 per week.

For a concurrent self-employment some Class 4 NIC may still be due at 1% on profits above £4,615 per year. The Inland Revenue can now grant partial deferment of Class 4 NIC due for 2003/04 and subsequent years.

Maximum Contributions

There is a limit on the total NICs payable at the main rate of 8% or 11% for 2003/04 but as the additional 1% due on earnings or profits above £30,940 is unlimited there can be no set maximum total figure.

The maximum NIC payable for 2003/04 must now be calculated for each individual based on his or her particular mixture of earnings using a formula set out in SI 2003/193.

National Insurance Contribution Rates

National Insurance Contribution (NIC) rates all increase by a 1% step from 6 April 2003. The additional 1% also applies above the upper earnings limit (£30,940) for employees and above the upper profits limit (£30,940) for the self-employed. The new rates are:

National Insurance Voluntary Contributions

Those who are employed or self-employed abroad and are not required to pay NICs can pay class 2 contributions voluntarily to keep up their contribution record. Those who are not earning whether living in the UK or abroad can pay class 3 contributions on a voluntary basis.