both employers and employees pay national insurance contributions (NICs), unless specifically exempted. Employees’ contributions, known as ‘primary NICs’, are deducted from earnings. The employer’s contributions (‘secondary NICs’) are charged on top of earnings. Employees’ NICs build up entitlements to certain social security benefits, including the state pension. They are charged at variable rates, depending on income thresholds and a number of other factors.
Primary (employee) NICs are payable at a rate of 12% on an employee’s gross earnings above the lower earnings threshold (GBP 8,424 per year in the tax year 2018-2019; GBP 8,628 per year in the tax year 2019-2020); and at a reduced rate of 2% on any earnings above the upper earnings limit (GBP 46,356 per year in the tax year 2018-2019; GBP 50,004 per year in the tax year 2019-2020).
Secondary (employer) NICs are payable at a rate of 13.8% of an employee’s gross earnings above the specified threshold (GBP 8,424 per year in the tax year2018-2019; GBP 8,628 per year in the tax year 2019-2020).
An employer must operate a ‘Pay As You Earn’ system (‘PAYE’), under which the appropriate amount of income tax and NICs is deducted directly from the employee’s pay. In order to operate a PAYE scheme, employers must register with Her Majesty’s Revenue and Customs (‘HMRC’). The employer must account for the relevant deductions to HMRC and report details of employees’ non-cash benefits and expenses.
Employers must maintain various records for each employee and also provide the employee and HMRC with certain information at the end of each tax year. They may have to pay a penalty if the PAYE owed is not paid on time and in full.