Explaining National Insurance Contributions

In the Spring Budget on 6 March 2024, Chancellor Jeremy Hunt announced significant changes to national insurance (NI) for both employees and the self-employed.

Effective from 6th April 2024, these changes aim to lessen the burden of NI contributions on both groups.

For employees, the primary NI rate will decrease from 10% to 8%, marking a 2-point reduction from the previous adjustment in January. Additionally, Class 4 NI contributions for the self-employed will drop from 9% to 6%. Furthermore, self-employed individuals will no longer be required to pay Class 2 NI. National Insurance (NI) contributions help fund the UK’s welfare state. You will notice that NI contributions and income tax are usually taken together through PAYE or paid for together if you need to pay for these through a self-assessment tax return.

What is National Insurance?

National insurance (NI) is a specific tax aimed at funding certain benefits. Contributions need to be made by individuals so that they are entitled to receive such benefits. NI contributions will be automatically deducted from your salary if you are employed, as well as paid by your employers, or it needs to be paid from profit made if you are self-employed.

What does National Insurance Pay for?

The government uses NI contributions to pay for the following benefits:

• Basic state pension and additional state pension (only applicable to men born before April 1951 and women born before April 1953)
• New state pension (this is now applicable to all men born after April 1951 and women born after April 1953)
• Contribution-based jobseeker’s allowance
• Contribution-based employment and support allowance
• Maternity allowance
• Bereavement support payment

Whether you are eligible to receive all or some of these benefits will be dependent on what class of NI you pay.

Who has to pay National Insurance?

NI contributions are mandatory for every UK citizen that is earning more than £242 per week from one job or self-employed and earning more than £12,570 a year. This still applies whether you plan to use any of the benefits in the future or not. You can start paying national insurance contributions from as early as 16 years old. You will need a NI number before you can start making contributions, these are usually automatically assigned when an individual turns 16 but otherwise can be applied for online.

If you are not employed, have low earnings, or live abroad you will not have to make NI contributions. However, you can choose to make voluntary payments to maintain your eligibility to receive benefits if you wish.

An example of why it may be beneficial to make voluntary NI contributions is to receive a state pension. When you’re not paying NI, this can be sometimes referred to as gaps in your record and some people decide to make voluntary payments to help cover these gaps. This is because to be of benefit of a state pension, it is not based on how much you have paid in NI payments but how long you have been contributing. If you do have gaps which you have not covered through voluntary payments, you may still be eligible for benefits, but you may receive less.

You will need a national insurance number before you start paying national insurance contributions.

Which National Insurance Class do I pay?

There are different categories of NI which are more commonly referred to as ‘Classes’. Your employment status determines which class you fall into, and from there which rate you will pay.

• Class 1- is paid for by employees earning more than £242 a week and under the state pension age.
• Class 1A and 1B – are paid for by employers if their employees are receiving benefits in kind for their expenses.
• Class 2- which was paid by self-employed has been abolished as of 6 April 2024. 
• Class 3 – is paid for by those who are making voluntary contributions because they are not currently employed or are classified as being under the small profit threshold.
• Class 4- is for the self-employed whose taxable earnings are above the £12,570 threshold.

How much do I pay for National Insurance?

When it comes to calculating how much NI you need to pay, not only is your NI Class considered, but also how much you earn, which determines how much you need to pay. Each NI Class has different rates according to your earnings.

Although NI is often collected together with income tax, it is not calculated in the same way in that it is not based on your annual earnings. Instead, NI is calculated on your individual pay period, whether that’s weekly, monthly or a different period as agreed with your employer. This means that if there are periods where you earn more, you will be charged more, and when you earn less, you will be charged less, or not at all if you do not meet the minimum threshold.

If you fall in Category A and you earn £1,500 per week you will pay:

• No NI on the first £242 of earnings
• 8% NI on earnings between £242 and £967
• 2% in earnings between £967 and £1,500
• In total you would pay £68.66 per week

Employers paying Class 1, Class 1a and Class 1B NI:

Employers pay NI Class 1A on employee’s expenses such as their salaries, but also on other lump sum payments, for example redundancy payments. NI Class 1B is paid on employees’ benefits if they are taxable (you can find out more about this in our article on Benefits-In-Kind).

There are some tax-advantageous schemes available which means employees can receive benefits without having to pay NI. These include the EMI share scheme.

Self-employed paying NI Class 2 and Class 4:

If you are self-employed, your NI contributions are not collected automatically through PAYE. Instead, you need to complete a self-assessment tax return once a year and pay your income tax and NI by 31 January each year. Your income may also fluctuate from week to week or month to month so there are slightly different calculations to work out how much you’ll need to pay for NI contributions.

Previously all self-employed individuals had to pay Class 2 NI as of 6th April 2024 self-employed people will no longer have to pay Class 2 NICs if their profits are above the small profit threshold of £6,725. They will still be able to however be entitled to benefits such as the state pension. However, you may still choose to pay class 2 NICs if your income is below the small profits threshold so you can receive NI benefits in the future.

If you are self-employed and your profits exceed the lower profits limit of £12,570 you will need to pay Class 4 NICs.

The main rate of National insurance for the self-employed has dropped from 9% to 6%, as of 6th April 2024. If your profits exceed £50,270 an additional 2% is charged on those earnings.

If you are a self-employed person making £55,000 profit a year you will pay in NICs:

• £0 in class 2 NI
• £2,251.2 in Class 4 NI at 6% on profits of £50,270
• £94.60 in Class 4 NI at 2% on the profits of £4,730
• In total you will pay £2,345.8 in NI for the year

Paying voluntary Class 3 NI:

Where you do not receive sufficient income or profits to make mandatory NI contributions or you have gaps in your national insurance record, you may choose to pay voluntary contributions, in order to remain eligible for state benefits.

 To qualify to receive the full state pension, you need to have made at least 35 years of NI contributions. If you have less than this then you will receive a reduced amount, but you must have made a minimum of 10 years’ worth of contributions to receive something. The fixed rate to pay for Class 3 NI for the tax year 2024/25 is £17.45 per week.

It is important to note that where you have been employed but earning a low income (between £123 to £242 a week), you do not need to pay any NI. However, you will still be treated as making qualifying contributions which will entitle you to the full state pension where you have built up enough years.

You can pay for voluntary Class 3 NI through direct debit or bank transfer and details can be found on the Government website. However, before making voluntary contributions, it is advised that you speak to the Future Pension Centre first, as voluntary contributions will not always increase your state pension.

What are National Insurance credits?

Some people may not be able to pay Class 3 NI such as those who are currently job seeking and are unemployed, those taking time out to care for children or other dependents, or those who are too ill to be working. In these cases, you may be eligible to receive NI credits which help towards building your qualifying years for your NI record.

There are two types of NI credits: Class 1 which covers your state pension and other benefits such as jobseekers allowance and Class 3 which only covers your state pension. Depending on your situation, you may be eligible for one or the other. Some credits are applied to your record automatically, whereas for others you have to contact your local job centre or apply for them in writing to HMRC. You can check your eligibility and find out how to receive the credits here.

What are National Insurance credits?

Employees no longer need to continue making NI contributions once they reach state pension age, regardless of whether they continue to be employed or not. However, employers must continue paying secondary Class 1 NI for employees who are state pension age or over, as per category C.

If you are employed, you can stop paying Class 1 and Class 2 NI when you reach state pension age and you can stop paying Class 4 NI at the end of the tax year in which you reach state pension age.