National Insurance (NI) was originally a separate charge on working income intended to pay for certain state benefits such as the old age pension and unemployment benefits. You weren’t entitled to the benefits if you didn’t pay it, and this policy for eligibility remains the same. It is not, however, a separate fund invested to produce those benefits – it simply goes to the Treasury.
Where income tax is paid on all of your income (including employment, savings, investments, etc), National Insurance is only charged on earned income. This means that you only pay it on the money you make through your employment, whether you are an employee or self-employed.
How much do you pay?
This depends on whether you are employed or self-employed and how much you earn.
If you are employed
The rates can vary from year to year but they are based on a percentage of your income above certain amounts (currently £1,048 per month, the same as the income tax personal allowance).
Class 1 contributions are based on your weekly or monthly earnings. If you get paid different amounts week or month you will only pay the amount due on any particular payday.
Your employer also pays NI contributions for employing you but these don’t affect your pay.
Your payslip should show what NI contributions you and your employer have made. You should receive a P60 every year which show your total NI contributions for the year.
If you are self-employed
If you are self-employed, there is a different system to pay NI contributions. The amount you pay doesn’t always entitle you to the same benefits as people who pay as employees.
If you are self-employed, you will pay Class 4 contributions. The amount you have to earn to start paying Class 4 contributions is the same as the tax Personal Allowance, £12,570.
If you earn below this, but above a minimum of £6,845 you will receive credits for Class 2 contributions even though you don’t pay them. National Insurance credits are added to your record when you’re not working or earning enough to pay NIC yourself, to help you still qualify for benefits like the State Pension.
If your profits are below the minimum threshold of £6,845, you can choose to make voluntary Class 2 contributions. These are currently £3.50 per week.
You can find more information about this on the government’s self-employed national insurance rates page and information about what benefits you are entitled to.
If you earn over £50,270
Whether employed or self-employed, once your earnings reach £50,270 your contributions on any earnings above this level will reduce to 2%.
How do you pay?
If you are in Pay As You Earn (PAYE), your employer will deduct the NI contributions from your pay along with the income tax. If you are self-employed, you will pay via your self-assessment tax return annually (and through Payments on Account, if applicable).
How many years must you pay?
Under the rules in place since 6 April 2016, anyone reaching state pension age from then on must generally have 35 full years of contributions to receive the full new state pension with a minimum of 10 years to get anything at all. It is possible to make up any shortfall in contributions with voluntary contributions going back 6 years (with a couple of exceptions to this rule). You should seek advice from the Department for Work and Pensions (DWP) or an independent agency to decide if this is the best course of action, read more here: https://www.gov.uk/voluntary-national-insurance-contributions
When do you stop paying NI contributions?
If employed, you stop paying on your state pension age birthday (66). If self-employed, you stop paying at the end of the year that you reach state pension age.
For detailed information look at: https://www.gov.uk/government/collections/national-insurance-detailed-information
