Explaining National Insurance Contributions

Update on new National Insurance Rates

The Spring Statement 2022 saw the government announce that changes would be coming in affecting National Insurance.

• What is happening to National Insurance?

The government have increased the National Insurance contribution payments made by employees, employers and the self-employed all by 1.25% for 1 year. After 1 year, it will then return to the current rates, but the additional 1.25% will instead be collected as a new ‘Health and Social Care Levy’.

• When is the new National Insurance increase happening?

The 1.25% National Insurance increase has come in from April 22 onwards.

• Why is there a new National Insurance increase?

The tax hike is expected to bring in £12 billion a year which will be used to support the NHS, as well as a proportion used to fund the social care system in England. The government aims to raise enough money that by October 2023, no one will pay more than £86,000 in social care costs. Those with assets of less than £20,000 will have their entire social care costs paid for by the state whilst those who have assets between £20,000 and £100,000 will have care costs subsidised.

• How will the new National Insurance increase affect me?
  • People who earn under £9,564 a year or £797 a month will not have to pay any National
  • Insurance contributions.
  • Those who earn £20,000 will pay an additional £130 in National Insurance per year.
  • Those who earn £30,000 will pay an additional £255 in National Insurance per year.
  • Those who earn £50,000 will pay an additional £505 in National Insurance per year.
  • Those who earn £80,000 will pay an additional £880 in National Insurance per year.
  • Those who earn £100,000 will pay an additional £1,130 in National Insurance per year.

What’s more, those who are of the state pension age but continue to work will have to pay the additional 1.25% levy.

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?

NI is a specific type of tax which helps fund certain benefits. Contributions need to be made by individuals so that they are entitled to receive such benefits. NI contributions will be taken from your salary if you are employed, it needs to be 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 regardless of whether you intend to use any of the benefits or not. You can start paying towards NI contributions as early as at the age of 16 so long as you are an employee earning at least £183 per week or you are self-employed and make a profit of over £6,515 per year.

Employers must also pay towards their employees’ NI. Employers need to pay employer’s NI for every employee they have that is over the age of 21 and earns over £169 per week, £732 per month or £8,722 per year. If an employer has employees which are under 21 or apprentices which are under the age of 25 then they must still pay NI but are allowed to pay less.

If you have low earnings or profit, live abroad, or are not employed, you will not have to make NI contributions. However, you can choose to make voluntary payments in order to maintain your eligibility to receive benefits if you wish. Where you’re not paying NI, this can sometimes be referred to as ‘gaps’ in your record. To access some benefits, such as the state pension, it is not how much you have paid in NI that qualifies you, but how long you have been contributing for. Therefore, some people choose to make voluntary NI payments to cover gaps. 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.

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 – paid for by employees earning more than £184 a week and under the state pension age
• Class 1A and 1B – paid for by employers towards their employee’s expenses and benefits if they receive any
• Class 2 – paid for by self-employed people earning at least £6,515 a year
• Class 3 – paid for by those who are making voluntary contributions because they are not currently employed or are on low income
• Class 4 – paid for by self-employed people earning over £9,569 a year

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.

Employees paying Class 1 NI:

If you fall into category A and you earn £1,000 per week you will pay:

• No NI on the first £183 of earnings
• 12% NI on earnings between £183.01 and £962
• 2% on earnings between £962.01 and £1,000
• In total, you would pay £94.24 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.

Class 2 is paid by all self-employed people who earn at least £6,475 profit a year. This is charged at a fixed rate of £3.05 per week. Class 4 NI then needs to be paid by all self-employed people who earn £9,501 profit a year or more. 9% is charged on the profits between £9,501 to £50,000 and then 2% is charged on all profits over £50,000.

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

• £158.60 in Class 2 NI (£3.05 per week x 52 weeks)
• £3,645 in Class 4 NI at 9% on the profits of £40,499
• £100 in Class 4 NI at 2% on the profits of £5,000
• In total, you would pay £3,903.60 in NI for a year

Paying voluntary Class 3 NI:

Where you do not receive sufficient income or profits to make mandatory NI contributions, 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 2022/23 is £15.85 per week.

It is important to note that where you have been employed but earning low income (between £120 to £183 a week), you do not need to pay any NI, but 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 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 other you have to contact your local Jobcentre for or apply for them in writing to HMRC. You can check your eligibility and find out how to receive the credits here.

When can I stop making National Insurance contributions?

Employees no longer need to continue making NI contributions once they reach state pension age, regardless of whether you 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 2 NI when you reach state pension age and you can stop paying Class 4 NI from 6 April after you reach state pension age.