NIM24170 - Class 4 NICs: structure: annual Class 4 NICs maximum from 6 April 2003: contributors who are employed and self-employed: general

Regulation 100 of the Social Security Contributions Regulations (SSCR) 2001 (SI 2001 No. 1004)

NIM24151 explains why, despite the introduction of an uncapped Class 4 NICs liability on all profits in excess of the Upper Profits Limit (UPL), an annual Class 4 NICs maximum is required.

Regulation 100, which sets out the annual Class 4 NICs maximum, applies only to contributors who are liable to pay both Class 1 and Class 4 NICs. This means that to apply regulation 100 a contributor must be self-employed with profits exceeding the Lower Profits Limit (LPL) and be an employed earner with earnings, in at least one employment, which exceeds the Primary Threshold. Unlike the pre 2003/2004 position, the contributor’s Class 1 and Class 2 NICs must first be compared to the Class 1 and Class 2 NICs annual maximum, with any excess Class 1 and 2 NICs dealt with before the Class 4 NICs maximum is applied.

The new Class 4 NICs annual maximum retains the same principle as the pre 2003/2004 maximum, by taking into account any Class 1 or 2 NICs that the person has paid or are payable. Although it takes these contributions into account the new calculation ensures that at least the additional Class 4 NICs percentage in Class 4 NICs is payable on all profits above the LPL. The calculation achieves this by retaining use of Class 2 and 4 maximum. The amount of Class 1 and 2 NICs paid or payable is compared to the Class 2 and 4 NICs maximum. However, instead of providing that the difference between these two figures is the amount of Class 4 NICs due, as was the pre 2003/2004 position, the new Class 4 maximum provides that that figure is the amount of Class 4 due at the main Class 4 percentage rate. This then allows the maximum calculation to provide for any additional Class 4 that may be due on the earner’s total profits.

In essence, the new Class 4 NICs annual maximum:

  • first sets out a Class 2 and main rate Class 4 NICs maximum. It does this by calculating the maximum amount of Class 4 NICs payable on profits between the UPL and the LPL and adds to that figure 53 Class 2 NICs at the rate in force for the year in question
  • it then deducts from that combined figure any Class 1 NICs that have been paid at the main Class 1 percentage and any Class 2 NICs payable
  • the difference, providing it is a positive figure, is the maximum amount of Class 4 NICs that the contributor is liable to pay at the main Class 4 NICs percentage
  • it then calculates the amount of profits that would be needed to pay that amount of Class 4 NICs and it deducts that figure from the contributor’s total profits
  • if that figure is a positive figure it represents the amount of profits on which Class 4 NICs at 2% (2.73% for the 2022 to 2023 tax year) are payable

To produce the above result regulation 100 provides a step by step calculation. The calculation allows every Class 4 NICs contributor who is subject to a Class 4 NICs annual maximum to fall into one of three categories:

  • those who are due to pay:
    • Class 4 NICs at a rate of the main Class 4 NICs percentage only
  • those who are due to pay:
    • a mixture of Class 4 NICs at rate of the main Class 4 NICs percentage and of the additional Class 4 NICs percentage and
  • those who are due to pay:
    • Class 4 NICs at a rate of the additional Class 4 NICs percentage only

The amount of a contributor’s profits and the amount of Class 1 and 2 NICs that have been paid or are payable will determine into which of the three categories the contributor falls. Regulation 100 deals with these three categories by labelling them Case 1, Case 2 and Case 3.

  • NIM24175 explains the general calculation method adopted by regulation 100.
  • NIM24176, explains the calculation method for case 1
  • NIM24177, explains the calculation method for case 2
  • NIM24178, explains the calculation method for case 3 and
  • NIM24180 onwards provides examples for each of the three cases.
  • NIM24050 provides a list of rates for Class 4 from the 2003-2004 tax year