NATIONAL INSURANCE | Tax Considerations

Class 1 National Insurance is payable by employees and employers. This accounted for 95 per cent of the total National Insurance fund in 2003/04. Class 1 contributions are payable by the employee (primary) and the employer (secondary). The liability to Class 1 National Insurance arises to the extent that earnings are paid to an individual, not earned. Also, unlike income tax, which is an annual charge, National Insurance is calculated on the earnings paid in an earnings period.

For 2004/05 the employer's rate of National Insurance is 12.8 per cent and the employee's rate is 11 per cent up to the upper earnings limit of £31,720 and 1 per cent above that.

Class 1A National Insurance contributions are payable by the employer on the provision of benefits in kind. This is payable at 12.8 per cent.

All benefits or facilities provided to an employee by reason of employment are generally taxable based on the cash equivalent value of the benefit or facility. In ITEPA 2003, the legislation on the taxation of benefits is contained within the benefits code. This covers in particular, expenses payments, vouchers and credit tokens, living accommodation, cars, vans and related benefits and loans.

There are special tax rules that apply to provision of benefits to directors and also to employees who earn more than £8,500. For those individuals who earn less than £8,500 (including benefits), there is no need to submit a P11D form with details of all benefits provided, to the Inland Revenue. This limit of £8,500 has remained for well over 25 years, resulting in the vast majority of employees exceeding the limit. The value of the benefit used to be taxable based on the cost to the employer. However, this has changed and now the value of the benefit is taxed upon the cash equivalent or monetary value.