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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: contributors who are employed and self-employed: general

Regulation 100 SS(C)R 2001

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 regulation100 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 exceed 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. 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 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 earners 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 paid
  • 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 1% 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 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