Understanding Class 1A and Class 1B National Insurance Contributions (Employers)

National Insurance contributions (NICs) are a vital consideration for employers, particularly when providing employee benefits or using PAYE Settlement Agreements (PSAs). While employees generally pay Class 1 NICs on their earnings, Class 1A and Class 1B contributions are the responsibility of the employer alone. Understanding how these contributions work, which benefits are subject to them, and the associated deadlines can help businesses manage costs effectively and stay compliant.

Class 1A NICs: What They Are and When They Apply

Class 1A NICs are charged on the cash equivalent of certain taxable benefits provided to employees. These benefits are non-cash forms of remuneration, which complement traditional salary and bonuses. Examples include the use of company cars, fuel, accommodation, beneficial loans, and private medical insurance. The employer calculates and pays Class 1A NICs at a rate of 15% (2025/26).

Not all benefits fall within Class 1A. Items that are exempt from income tax, such as work mobile phones, car parking spaces, or certain childcare provisions, are also exempt from Class 1A contributions. Similarly, benefits provided purely for business purposes, such as a laptop used exclusively for work, do not attract Class 1A NICs. However, if a benefit has both personal and business use, Class 1A NICs will normally be charged on the full value, even if the employee can claim partial tax relief.

For employers, timing is crucial. Class 1A NICs on regular taxable benefits are typically paid in July following the end of the tax year. For taxable termination payments exceeding certain limits, the contributions must be reported and paid through the PAYE system shortly after the payment is made. This distinction ensures that the correct NICs are applied and deadlines are met.

Examples of Class 1A NICs

• Company Cars and Fuel: Employers must pay Class 1A NICs on the cash value of company cars and fuel provided for personal use.

• Private Medical Insurance: Where an employer arranges medical insurance directly with a provider, Class 1A NICs are due.

• Loans and Other Benefits: Low-interest or interest-free loans, as well as other perks like accommodation, are included in the Class 1A calculation if they have a taxable value.

It’s important to note that if a benefit is treated as earnings under normal Class 1 NICs, Class 1A does not apply. For instance, benefits such as store vouchers or cash-equivalent awards classified as earnings are subject to standard employer NICs, but not Class 1A.

Class 1B NICs: PAYE Settlement Agreements

Class 1B NICs arise in connection with PAYE Settlement Agreements. A PSA allows an employer to manage the tax liability on minor or irregular benefits on behalf of employees. This can simplify administration and ensure compliance, particularly for benefits that are provided occasionally or in small amounts.

Class 1B NICs are calculated on the grossed-up value of the benefits included in the PSA, including any tax the employer pays on the employee’s behalf. Like Class 1A, the rate is 15% (2025/26), but the payment is generally made annually in October.

Managing Employer Obligations

Employers must carefully consider which benefits attract Class 1A or Class 1B NICs. Key considerations include:

• Business vs Personal Use: Benefits provided partly for personal reasons will attract Class 1A NICs on the full value.

• Reimbursed Expenses: Genuine business expenses reimbursed to employees are generally not subject to Class 1A or 1B NICs.

• Termination Payments: Certain benefits or payments made upon termination may trigger Class 1A NICs, requiring timely reporting and payment.

• PSA Scope: Minor and irregular benefits can be managed through a PSA, which may simplify administration but requires Class 1B contributions.

Interest and Penalties for Late Payment

Late payment of Class 1A or 1B NICs attracts interest from the due date. Penalties increase with the length of the delay, including additional charges for late filing of forms. For example, filing the required reporting forms late may result in fixed penalties for each month overdue. Employers should prioritise timely reporting and payment to avoid unnecessary costs.

Benefits of Proper NIC Management

Effectively managing Class 1A and 1B NICs provides several advantages for employers:

• Cost Control: Understanding which benefits are liable will help manage employer contributions and avoid unexpected expenses.

• Simplified Administration: Using PSAs for minor or irregular benefits streamlines payroll processes and reduces administrative burden.

• Compliance: Accurate calculation and timely payment reduce the risk of penalties, interest, and disputes with tax authorities.

• Employee Satisfaction: Proper handling of benefits ensures employees receive their entitlements without confusion over tax or NIC obligations.

Speak to an Expert

Navigating NICs and PSAs can be complex, particularly for businesses offering a wide range of employee benefits. Whether you want guidance on which benefits attract Class 1A NICs, how to structure a PSA, or the timing of payments and reporting, expert advice can help you stay compliant while optimising costs.

If your business provides employee benefits or you are considering implementing a PSA, our team is ready to provide tailored advice. We can help you understand the full implications of Class 1A and 1B NICs, ensure accurate reporting, and manage payments efficiently, giving you confidence in your payroll and benefits administration.

Authored by: London Team