UK Fact-File Part 7: UK Business Owner Welfare and Lifestyle

7.1 UK Business Social Security

The social security system

All workers must pay national insurance contributions (NICs), whether employed or self-employed.

Employees will have class 1 NICs (allowing them to build up entitlement to social security benefits such as the state pension) deducted from their wages by their employer, with the employer additionally making a contribution on the employee’s behalf.

Self-employed individuals must pay Class 2 National Insurance Contributions (potentially allowing them to claim the basic state pension, maternity leave and Bereavement Benefit, but not the additional State Pension, Statutory Sick Pay or Jobseeker's Allowance) and these can be paid by direct debit on a monthly basis. The rate for tax year 2010/2011 is GBP2.40 per week.

A self-employed individual with profits of over GBP5,715 must also pay Class 4 NICs – these are additional contributions based on profit levels. The rate is 8% on profits between GBP5,175 and GBP43,875 and 1% for profits in excess of the upper limit.

Voluntary class 3 contributions can also be paid, currently at a flat rate of GBP12.05 per week, in order to fill any gaps in a taxpayer’s national insurance record which could prevent or reduce their access to certain benefits, or to increase the level of benefits for which they will be eligible.

Directors of a company are usually classed as employees and will be liable to pay Class 1 NICs. The 2010/2011 Class 1 rate, calculated as a percentage of gross earnings, is 11% for employees and 12.8% for employers. The lower and upper earnings limits applicable to Class 1 NICs are GBP97 per week and GBP844 respectively.

Non-UK residents who earn an income from the UK are liable for tax and NICs at the same rates. Specific conditions apply to foreign entertainers and sportspersons, where withholding tax applies, normally at 22%. NICs payable on earnings in the UK are non-refundable when a non-UK resident leaves the UK as the contributions are to provide for benefits such as statutory sick pay whilst working in the UK.