National Insurance Contributions – The Basics

Understanding National Insurance has been made simple in this post. As expert contractor accountants, we provide insight into the financial world.

Who pays National Insurance?

You pay National Insurance contributions, whether you’re an employee or self-employed, you’re aged 16 or over and you earn more than a certain level, in order to build up your entitlement to certain state benefits, including the State Pension. The contributions paid, depend on how much you earn and whether you’re employed or self-employed. You stop paying National Insurance contributions when you reach State Pension age.
If you are self-employed, you stop paying Class 2 contributions as soon as you reach State Pension age, and Class 4 contributions from the start of the tax year after the one in which you reach State Pension age.
State Pension age is 65 for men born before 6 April 1959 and 60 for women born before 6 April 1950. But it will gradually increase to 65 for women between 2010 and 2020.

State benefits dependant on National Insurance contributions

Your entitlement to certain state benefits and the amount you can get depends on your National Insurance contributions record. (In some cases it depends on your spouse or civil partner’s contributions.) These benefits include:

  • State Pension
  • contribution-based Jobseeker’s Allowance
  • Bereavement Allowance
  • contribution-based Employment and Support Allowance

How much you pay

The amount and type of National Insurance contributions you pay depend on whether you’re employed or self-employed and how much you earn. The rates shown below are for the 2011-12 tax year.

If you’re employed

If you’re employed you pay Class 1 National Insurance contributions. The rates are:

  • if you earn more than £139 a week and up to £817 a week, you pay 12 per cent of the amount you earn between £139 and £817
  • if you earn more than £817 a week, you also pay 2 per cent of all your earnings over £817

You pay a lower rate if you’re a member of your employer’s contracted-out pension scheme.
Your contributions are deducted from your wages by your employer

If you’re self-employed

If you’re self-employed you pay Class 2 and Class 4 National Insurance contributions. The rates are:

  • Class 2 National Insurance contributions are paid at a flat rate of £2.50 a week
  • Class 4 National Insurance contributions are paid as a percentage of your annual taxable profits – 9 per cent on profits between £7,225 and £42,475, and a further 2 per cent on profits over that amount

If your profits are expected to be less than £5,315 you may not have to pay Class 2 National Insurance contributions.
From April 2011, your Class 2 National Insurance contributions payments will become due on 31 January and 31 July, the same as a Self Assessment tax bill. You pay Class 2 National Insurance contributions either monthly or six monthly by Direct Debit – follow the first link below for more information about payment dates.

Contribution classes

National insurance contributions (NICs) fall into a number of classes. Class 1, 2 and 3 NICs paid are credited to an individual’s NI account, which determines eligibility for certain benefits – including the state pension. Class 1A, 1B and 4 NIC do not count towards benefit entitlements but must still be paid if due.

More Posts

Basis Period Reform

The article helps self-employed sole traders and partnerships to understand how basis period reform will impact their business in the 2023/24 transitional tax year, and what steps need to be taken to ensure they do not lose any brought forward tax reliefs and remain compliant!

George Ian Hope

Tax Payment Dates and Estimating the Values of Tax Payable

The article outlines the typical tax payment dates and methods of estimating the values of tax payable for each type of tax, including VAT, PAYE, NIC, CIS, Corporation Tax, and Dividend and Personal Taxes.

George Ian Hope

Corporation Tax Rate Changes

In the March 2021 Budget Rishi Sunak proposed a number of changes to the way that Corporation Tax will be calculated and applied and these changes will come into effect from 1st April 2023.

George Ian Hope