How Do National Insurance Contributions Work?

National Insurance Contributions are a deduction that the majority of employees and workers will be accustomed to seeing on their payslips, and a mandatory tax payment that the majority of employers and the self-employed will be accustomed to paying. Still, many of us will not be familiar with how this is calculated and how much we are liable to pay.

The following general guide explains how the National Insurance system operates in the UK.

 

What are National Insurance Contributions?

 

Under the current system, all workers, including both the employed and self-employed, “earn” entitlement to certain benefits and the State Pension by paying contributions on their earnings or trading profits. These are known as National Insurance Contributions (NICs), where access to benefits or a pension from the government depend on a satisfactory record of NICs over a given period. The National Insurance scheme is essentially funded on a “pay as you go” basis by contributions from the employed, self-employed and employers.

 

Who pays National Insurance Contributions?

 

As an employer, you will be liable to pay National Insurance Contributions on your employee’s earnings, as well as any expenses and benefits. As an employed individual, you will be liable to pay National Insurance Contributions if you are 16 or over and are either:

• an employee or worker earning above £242 a week, or
• self-employed and making a profit of more than £12,570 a year.

You do not pay NICs, but will still qualify for certain benefits and the State Pension, if you are either an employee earning between £123 and £242 a week, or are self-employed and your profits are between £6,725 and £12,570 a year. In these circumstances, your contributions will be treated as having been paid to protect your National Insurance record.

You may also be able to get NI credits if you are not currently paying National Insurance Contributions, for example, if you are claiming benefits because you are unemployed, or unable to work due to incapacity or caring for someone full time. National Insurance credits can help to avoid gaps in your NI record and protect your benefits. However, if you have gaps in your record because you do not pay National Insurance Contributions or do not get National Insurance credits, you may be able to make voluntary contributions.

 

Can you make voluntary National Insurance Contributions?

 

You may be able to pay voluntary contributions to fill gaps in your National Insurance record. You may get gaps in your record if you do not pay NICs or do not get NI credits. This could be because you were employed but on low earnings, unemployed and not claiming benefits, self-employed but did not pay NICs because of small trading profits, or even because you were living or working outside of the UK.

Any gaps in your National Insurance record may mean you will not have enough years of National Insurance Contributions to either qualify for the full State Pension, sometimes referred to as ‘qualifying years’, and/or to qualify for certain benefits. You can check your National Insurance record online at GOV.UK to find out if you have any gaps in your record, as well as if you are eligible to pay voluntary contributions and how much this will cost.

 

What are the classes of National Insurance Contributions?

 

There are different types of National Insurance, known as ‘classes’, where the class of NICs you will be liable to pay depends on your employment status and how much you earn:

• Class 1 NICs are paid by employees who are under State Pension age earning more than £242 a week from one job, and the employer also pays Class 1 National Insurance Contributions based on the employee’s earnings over £175 a week
• Class 1A or 1B NICs are paid by employers on their employee’s expenses and benefits
• Class 2 NICs are paid by the self-employed with trading profits of £12,570 or more a year
• Class 3 NICs are voluntary contributions that both employees or self-employed people can pay to fill or avoid gaps in their NI record
• Class 4 NICs are for self-employed people earning profits of £12,570 or more a year.

If you are employed, you will stop paying Class 1 National Insurance Contributions when you reach the State Pension age. If you are self-employed, you will stop paying Class 2 NICs when you reach State Pension age and Class 4 NICs from 6 April, the start of the tax year, after you reach State Pension age. Your State Pension age is the earliest age that you can start receiving your State Pension, where this may be different to the age you can get any occupational or personal pension. You can check your State Pension age online at GOV.UK.

 

How much are National Insurance Contributions?

 

The amount of National Insurance Contributions that you pay will depend on which class of NICs you fall into, based on your employment status and how much you earn. Importantly, the temporary 1.25 percent point increase in NI rates introduced to help fund the NHS and social care in the UK were reversed with effect from 6 November 2022. The introduction of a separate Health and Social Care Levy in April 2023 has also been cancelled.

 

If you are employed

If you are employed and pay Class 1 National Insurance Contributions, the rates for most employees for the tax year 2023 to 2024 are:

• 12% on pay between £242 to £967 per week (£1,048 to £4,189 per month)
  2% on pay over £967 per week (£4,189 per month).

Different rates may occasionally apply, depending on the National Insurance category letter used when running payroll. Most employees will fall into category A, although you will pay less, for example, if you are a married woman or widow (NI Category B) or you are deferring National Insurance because you have more than one job (NI Category J).

 

If you are an employer

As an employer you will be liable to pay Class 1 NICs at a rate of 13.8% for 2023/24 on employee earnings over £175 per week or £758 per month. However, depending on the NI category applied to an employee when running payroll to work out how much you both need to contribute, a different rate may apply. You will also pay Class 1A and 1B NICs on expenses and benefits you give to your employees at a rate of 13.8% for 2023/24.

 

If you are self-employed

If you are self-employed and pay Class 2 and Class 4 National Insurance Contributions, the rates are as follows:

• Class 2 NICs at a rate of £3.45 a week if your profits are £12,570 or more a year
• Class 4 NICs at 9% on any trading profits between £12,570 and £50,270 and 2% on trading profits over £50,270.

If your profits are between £6,725 and £12,570 a year, your contributions will be treated as having been paid to protect your National Insurance record. If you are an employee but also do self-employed work, your employer will deduct your Class 1 NICs from your wages, and you may also have to pay Class 2 and Class 4 NICs for your self-employed work.

 

How are National Insurance Contributions calculated?

 

An employee’s Class 1 National Insurance is made up of contributions deducted from their pay (employee’s National Insurance) and paid by their employer (employer’s National Insurance), where the amounts deducted and paid depend on how much of your earnings fall within each band. For example, if you earn £1,000 in a week, you will pay nothing on the first £242, with 12% (£87) on your earnings between £242.01 and £967, plus 2% (£0.66) on the remaining earnings above £967. This means that your National Insurance Contributions deducted from your wages will be £87.66 for the week.

For an employer, adopting the same example of an employee earning £1,000 in a week, in addition to the £87.66 deduction from the employee’s pay packet, you would pay nothing on the first £175 and 13.8% on the remaining £825 (£113.85). The total Class 1 National Insurance Contributions due on weekly earnings of £1,000, as payable by both the employer and employee combined, would therefore be £201.51. If you are an employer you can find a useful online calculator at GOV.UK to check your payroll calculations, including deductions for both employer and employee NICs based on different category letters.

If you are self-employed, in a similar way to employees, the amount of National Insurance Contributions that you will be liable to pay on self-assessment will depend on how much you have earned and how much of your trading profits falls within each band. There is an online ready reckoner at GOV.UK that can help you budget for your 2023/24 tax bill if you are self-employed. Using this calculator, if your average weekly profit is £1,000 — where your profit is the amount left over after deductions have been taken from your self-employed income for qualifying business expenses — you would pay £179.40 Class 2 NICs (£3.45 x 52) + £3,427.60 Class 4 NICs for the total year (£3,607). This is calculated as an annual trading profit of £52,000, with Class 4 NICs payable at a rate of 9% on the difference between £12,570 and £50,270 (£37,700 x 9% = £3,393) and a rate of 2% on the remaining difference between £50,270 and £52,000 (£1,730 x 2% = £34.60).

 

How are National Insurance Contributions paid?

 

If you are employed, you will pay your National Insurance Contributions along with your Income Tax. Your employer will deduct both your tax and NICs directly from your wages before you get paid using PAYE (Pay As You Earn). Your weekly or monthly payslip will show the amount of your contributions. Equally, if you are a director of a limited company, you may also be your own employee and pay Class 1 NICs through your PAYE payroll.

If you are self-employed, you will pay both your tax and NICs through self-assessment. This is a system used by HMRC by which you report your trading profits within an annual tax return, where your Income Tax and National Insurance will be assessed based on those declared profits, after deducting allowable business expenses. The self-employment tax year runs from 6 April to 5 April, although you must complete your self-assessment tax return and pay any tax and NICs due by midnight on 31 January following the end of the tax year.

In most cases, you will need to pay the balance for any tax owed for the previous tax year, although you will also usually be liable to make an additional payment on account in advance, together with a second advance payment by 31 July of that same year. If you are submitting a paper return instead of filing online there is an earlier deadline of midnight on October 31 in the same year as the tax year ends, although you will still have until January 31 of the following year to pay any tax and National Insurance Contributions that you owe.

 

Penalties for non-payment of NICs?

 

If you are an employee, your employer will be responsible for deducting what you owe by way of National Insurance Contributions through PAYE. Importantly, as an employer, HMRC will charge late payment penalties on PAYE amounts that are not paid in full and on time. These include monthly, quarterly or annual PAYE; Class 1 National Insurance Contributions; and annual payments of employers’ Class 1A and Class 1B NICs.

Employer penalties can vary, depending on the nature of the late payment, the number of defaults in a tax year or by how long your payment is late, but will usually be a percentage of the amount overdue, which may then increase with the severity of the default. There may also be interest added to the amount outstanding on a daily basis. It may be possible to appeal against a penalty, but you would need to have good grounds to do so.

For the self-employed, who must file their return and make payment by a strict deadline, there will be set penalties for late returns, together with interest on any unpaid amount. Again, it may be possible to appeal a penalty, but you must have a reasonable excuse.