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On page 86 of Kaplan text book (for FA 2017) it is stated that ‘The total employee class 1 contributions from all employment is subject to an overall annual maximum’. What does it actually mean? I understand that in case of 2 jobs, NIC 1 for the employee will be calculated separately using £8164 as the limit (separately for each job).
I have a question related to Janet’s class 1 NIC when she is considered as an employee. Why the £45000 annual limit (or 45,000/12 = 3750) is considered when her annual salary of 18k and bonus 10k are below this limit? Without looking at the answer, I calculated the NIC contribution for her like how it is calculated when she is considered as a director.
I do not understand the reason for the below 2 calculations in this example:
(£3,750 – £680) x 12% x 1 month
(£11,500 – £3,750) x 2% x 1 month
Between 8,164 and 45,000 p.a. the rate is 12%. Thus the monthly limit is 45,000/12 = 3,750 (NB 8,164/12 = 680 hence taxed on 3,750 – 680 = 3,070 @ 12%)
In the month she is paid 1,500 + 10,000 (bonus), her salary as an employee is 11,500. Thus 3,080 @ 12% and remainder (7,750) @ 2%.
Check the workings again and you will notice that for the other 11 months, since she earns less than the 3,750 limit, she is taxed at 12% on 1,500 ( which is 18,000/12).
As for your question on why this is the case even though the two are below 45,000 in total, you have to remember that the Class 1 NIC is calculated on an earnings period basis (weekly, fortnightly, monthly etc) and hence the limits are based on the total divided by the proportion relating to the payment period (1/52, 1/26, 1/12)
Hope this helps.
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