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HMRC internal manual

National Insurance Manual

Class 1 structural overview from 6 April 2003 to 5 April 2009: background

In his 2002 Budget Statement, the Chancellor announced that, with effect from 6 April 2003, a new primary Class 1 NICs liability would exist on all earnings exceeding the Upper Earnings Limit. The new liability was set at 1%.

In addition, the Chancellor announced a 1% increase in the existing rate of primary Class 1 NICs on earnings above the Primary Threshold up to and including the Upper Earnings Limit. He also announced a 1% increase in the rate of secondary Class 1 NICs on all earnings above the Secondary Threshold.

Although the changes affect the method by which primary Class 1 NICs are calculated and the amount of Class 1 NICs that will be due from 6 April 2003, no changes were made to the underlying principles of Class 1 NICs liability.

Liability to pay primary Class 1 NICs continues to arise:

  • only when the earnings are placed unconditionally at the employee’s disposal (but special rules apply for certain avoidance type earnings, see NIM04000)
  • only when the earnings exceed the Primary Threshold
  • in the earnings period in which the earnings are paid.

One of the main considerations in introducing a primary Class 1 liability on earnings above the Upper Earnings Limit was to ensure that as little disruption as possible was made to the way in which Class 1 NICs continue to be reported and paid by employers.

To minimise administrative burdens, employers are not required to record separately on End of Year returns the additional 1% primary liability due on earnings in excess of the Upper Earning Limit. Employers will continue to deduct and report the total amount of primary Class 1 NICs due as a single figure.

Neither are employers required to report earnings above the Upper Earnings Limit for NICs purposes on End of Year returns. The new primary liability is reported as part of the total primary contribution payable. Further guidance on the Class 1 NICs reporting arrangements for the 2003 to 2004 tax year can be found at NIM11032 onwards.

Equally, to ensure that the changes have no impact on benefit entitlement, the Upper Earnings Limit remains in place for the purposes of calculating contributory benefits. Earnings above the Upper Earnings Limit on which the new primary liability exists are excluded from the calculation of earnings factors, see NIM01150 for more information.

Although the impact of the changes have been kept to a minimum, the introduction of a primary liability on earnings above the Upper Earnings Limit has consequential effects on certain Class 1 issues. The main areas affected were: