Class 1 structural overview from 6 April 2003 to 5 April 2009: structural changes: the Class 1 and 2 annual maximum: purpose of retaining a maximum
NIM01161 explains the reasons why retaining an annual maximum for contributors with more that one job is important. Without a prescribed annual maximum an earner would face paying, in respect of each separate employment:
- Class 1 NICs at the main primary percentage (currently 11%) on all earnings between the Primary Threshold and the Upper Earnings Limit, and
- Class 1 NICs at the additional primary percentage (currently 1%) on all earnings in excess of the UEL.
Such earners would also face paying Class 2 NICs if they were concurrently self-employed.
Although the amount of additional primary Class 1 NICs due can only be limited by the extent of an earner’s earnings above the UEL, the absence of a maximum, from April 2003, would require an earner with more than one job to pay:
- the main primary percentage (11%) on all earnings between the PT and the UEL in each employment
- the additional primary percentage (1%) on all earnings above the UEL in each employment and
- a full year of Class 2 NICs, where the employee is also self employed throughout the tax year.
Since entitlement to contributory benefit continues to be derived from earnings on which main rate Class 1 NICs are paid and/or the payment of Class 2 NICs, the annual maximum ensures that each contributor is required to pay approximately the same amount of NICs on the same amount of earnings to derive maximum benefit entitlement.
The annual maximum retains many of the concepts inherent in the universal maximum which applied to tax years prior to 6 April 2003. It continues to:
- provide a maximum that can be made up of both Class 1 and Class 2 NIC
- retain, in part, the concept of a 53 week maximum
- apply to all employed contributors, irrespective of the type of employment they hold
- recognise that some contributors will pay NICs at a reduced rate either because they are:
- in contracted-out employment or
- they hold a valid married woman’s or widow’s reduced rate election (see NIM30000-NIM30028 and NIM31000-NIM31019, respectively).
The new annual maximum achieves this by providing a limit on the amount of earnings that can be charged at 11%. That limit is set at 53 x the weekly UEL - PT. Each contributor is provided with this maximum by virtue of steps 1, 2, 3 and 8 of regulation 21, see NIM01163.
The maximum also provides by virtue of these steps that no contributor shall have an annual Class 1 and 2 maximum of less than 11% on an amount of earnings which equals the weekly UEL less the weekly PT multiplied by 53.
Although all contributors are subject to a maximum figure of not less than the equivalent of 11% on an amount of earnings that equals 53 x the UEL - PT, the maximum calculation recognises that some earners will receive earnings in excess of this amount. Where this occurs the maximum charges an additional 1% on those earnings, provided that at the time they were paid they were above the Primary Threshold.
This additional amount is provided by steps 4, 5, 6 and 7 of regulation 21.
Since the Class 1 and 2 maximum is calculated by reference to the amount of a person’s earnings received from employed earner’s employment, the amount of earnings from self employment is not relevant for the purposes of this calculation. Profits or gains from self employment are relevant for the purposes of determining the Class 4 maximum but they play no part in calculating the amount of a person’s Class 1 and 2 maximum.
It is important to remember that the Class 1 and 2 maximum provides for an amount of contributions to be paid that equals the sum provided by the calculation. That amount can be made up solely by the payment of Class 1 contributions or from a combination of Class 1 and 2 contributions. While both Class 1 and 2 NICs may be payable to reach the maximum, the amount of the maximum is calculated only by reference to the amount of Class 1 earnings.