Expanding your business overseas is an exciting venture, but it comes with a set of administrative and legal responsibilities. If your company is considering entering the United Kingdom market, one critical aspect you need to understand is National Insurance (NI). National Insurance is a social security system in the UK that provides various benefits to residents. This article will guide overseas companies on what they need to know about National Insurance in the UK.

What is National Insurance?

National Insurance is a mandatory financial contribution scheme in the United Kingdom that funds various social benefits, including the National Health Service (NHS), state pensions, unemployment benefits, and more. It is different from income tax and is payable by both employees and employers. National Insurance contributions (NICs) are collected by HM Revenue and Customs (HMRC), the UK’s tax authority.

Understanding the Types of National Insurance Contributions

Class 1 NICs: These contributions are typically paid by employees and employers and are based on an individual’s earnings above certain thresholds. Employees pay a percentage of their earnings (12% for most employees), while employers also make contributions based on their employees’ earnings, at a rate of 13.8%. The contributions start at age 16 and stop once the individual reaches state pension age. Note that the Chancellor is now aiming to cut the 10% rate to 8% from 6 April 2024 following the Spring Budget.

Classes 1A and 1B NICs: These are charged on the cash equivalent of certain taxable employment benefits at a rate of 13.8%, and are paid by the employer. They are payable after the end of the tax year to which they relate.

Class 2 NICs: These are paid by self-employed individuals at a flat rate of £3.45 per week for the 2023/24 tax year, but following the Autumn Statement, Class 2 contributions will not be required from 6 April 2024. However, workers will still receive access to contributory state benefits. There are certain thresholds and exemptions that self-employed individuals should be aware of. These can also be paid on a voluntary basis for those with lower profits, or in certain industries, to prevent gaps in their NI records, and these voluntary contributions can continue in 2024/25 at the same rate as in 2023/24.

Class 3 NICs: Voluntary contributions that other individuals can pay to fill gaps in their National Insurance record, usually to qualify for certain state benefits, if they do not qualify for voluntary Class 2 contributions. The current flat rate is £17.45 per week, which will continue for 2024/25.

Class 4 NICs: These are paid by self-employed individuals on their annual profits above a certain threshold. For 2023/24, they pay 9% on profits between £12,750 and £50,270, and 2% thereafter. From April 2024, the main 9% rate is being cut to 6%. The 2% rate will remain.

What Overseas Companies Need to Know

Employer Responsibilities: If you hire employees in the UK, you are responsible for deducting Class 1 NICs from their salaries and making your own employer contributions. Ensure that you are registered with HMRC as an employer.

Employee Responsibilities: Inform your employees about their National Insurance obligations, including the need to provide a National Insurance number (NINO) and update their status if they are moving to the UK. Employees coming from overseas may need to apply for a NINO.

Tax Year and Reporting: NICs are deducted and paid over to HMRC in each pay period. Directors’ NICs are also paid in each period, but are assessed on their annual earnings. Note that the UK tax year runs from April 6th to April 5th of the following year. Ensure that you report and pay contributions accurately and on time.

Expatriate Employees: If your overseas employees are temporarily working in the UK, they may need to continue paying National Insurance contributions in their home country or through a reciprocal agreement.

Double Taxation Agreements: Understand any double taxation agreements that might exist between the UK and your home country to avoid paying Social Security contributions in both jurisdictions on the same pay.

Exemptions and Allowances: Be aware of any exemptions, allowances, and reliefs that may apply to your business. Some industries or regions may have specific National Insurance rules.

Record Keeping: Maintain accurate records of all National Insurance contributions made by your employees and your company. These records are essential for compliance and audits.

In summary

Navigating the complexities of National Insurance in the UK can be challenging for overseas companies, but it’s a crucial aspect of doing business in the country. Compliance with National Insurance regulations is essential to avoid legal issues and provide your employees with the benefits they are entitled to. Seek professional advice from tax experts or legal advisers with knowledge of UK tax laws to ensure that your overseas business is fully compliant with National Insurance requirements. By doing so, you’ll be on the right track to a successful expansion in the UK market while fulfilling your social responsibility to your employees.

How we’ve helped

A common scenario we encounter is that of overseas employees temporarily working in the UK. Without applying for the appropriate National Insurance exemption certificate, the default for the UK employer will be that any UK salary earned will be subject to both Income Tax and National Insurance. Hence, it is important the correct forms are in place before the employee commences work.

Similarly, UK employees working temporarily overseas will also need to apply for a certificate of continuing liability for UK National Insurance with HMRC.

In both scenarios we have assisted clients who were simply unaware of the legislation and assisted with completing the necessary forms.