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HMRC internal manual

National Insurance Manual

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HM Revenue & Customs
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Class 4 NICs: Structure: Annual Class 4 NICs maximum from 6 April 2003: Purpose of retaining a maximum

Regulation 100, SS(C)R 2001

Guidance on the annual Class 4 NICs maximum for all tax years up to and including the2002/2003 tax year is provided at NIM24100 et seq. Thefollowing guidance relates solely to tax years beginning 2003/2004 onwards.

As the annual Class 4 NICs maximum for tax years 2003/2004 onwards retains certainfeatures of the pre 2003/2004 Class 4 NICs maximum and remains linked to the Class 1 and 2NICs annual maximum, it is advisable to familiarise yourself with how these calculationsoperate. Guidance on the Class 1 and 2 NICs maximum from 6 April 2003 is contained at NIM01160.

NIM11001 onwards (Class 1) NIM20001 onwards(Class 2) and NIM24030 onwards (Class 4) provides detailedguidance on the calculation methods used to determine a contributor’s liability forthe different classes of NICs.

Primary legislation contained within SSCBA 92, which sets out the conditions under whichliability for NICs arises, imposes a full liability in respect of each employment held bya contributor. The effect of this is that, without some form of limiting factor, acontributor who holds more than one employment, or who is both employed and self-employed,would face a NICs liability on all of their earnings/profits above the appropriatethresholds from each employment held. This would mean that such contributors could pay farmore NI that is necessary to secure full benefit entitlement and far more NI than acontributor who earns the same amount but from a single employment.

The annual Class 1 and 2 NICs maximum is the device which limits the amount of Class 1 andClass 2 NICs payable by any earner who holds more than one employment. The annual Class 4NICs maximum is the device that limits the amount of Class 4 NICs payable in a tax year inaddition to any Class 1 and 2 NICs payable.

Prior to 6 April 2003 all contributors who were employed and self-employed were limited toa universal Class 1, 2 and 4 NICs annual maximum figure. This was based on the same Class1 and 2 NICs maximum figure, except that a contributor’s liability for Class 4 NICs waslimited to an amount which, when added to any Class 1 and 2 NICs paid equalled:

  • the maximum amount of Class 4 NICs payable on profits between the Lower and Upper Profit Limits, plus
  • 53 Class 2 NICs.

Although not provided for in legislation the figure against which any Class 1 and 2NICs were deducted is often referred to as the Class 2 and 4 NICs maximum.

Where the amount of Class 1 and 2 NICs paid exceeds the Class 2 and 4 NICs maximum noClass 4 are due. The Class 1, 2 and 4 NICs annual maximum could be made up by the paymentof Class 1 NICs only, or Class 1 and 2 NICs only or a combination of Class 1, 2 and 4NICs. The same maximum figure applied whether or not the contributor had earnings inexcess of the Upper Earnings Limit and/or profits in excess of the Upper Profits Limit.

From 6 April 2003 changes to the structure of Class 4 NICs, see NIM24030,included the introduction, for the first time, of an uncapped Class 4 NICs liability onall profits in excess of the Upper Profits Limit. The introduction of this additionalliability, whilst uncapped, does nothing to limit the power of the primary legislation incases where a contributor holds more than one employment. This means that suchcontributors would, without the retention of a Class 4 NICs maximum, be required to payClass 4 NICs on all of their profits above the Lower Profits Limit whilst, at the sametime, paying Class 1 NICs on all of their earnings above the Primary Threshold.

For this reason there remains an annual Class 4 NICs maximum for tax years 2003/2004onwards. Retention of a Class 4 NICs annual maximum means that a contributor who is bothemployed and self-employed is required to pay, broadly, the same amount of NICs as aperson who has equivalent earnings but solely from being an employee.

Although the principle of an annual maximum is retained, the uncapped Class 4 NICsliability on profits above the Upper Earnings Limit means that there can no longer be auniversal maximum figure applying to all contributors. Instead all contributors who areboth employed and self-employed are provided with an individualised maximum. Thisindividualised maximum is determined by reference to individual profits and the amount ofClass 1 and 2 NICs paid.

Guidance on the Class 4 NICs annual maxima applying from 6 April 2003 can be found at:

  • NIM24152 where the contributor is self-employed only
  • NIM24170 where the contributor is both self-employed and employed