National Insurance is a tax on your earnings and self-employed profits. Nearly all workers in the UK have to pay national insurance and income tax. National insurance is paid into a fund, which is then used to pay some state benefits. These include state pension, statutory sick pay, maternity leave or entitlement to additional unemployment benefits. National insurance is paid by employers as well as employees and self-employed workers. If you are an employee the money is deducted from your wages by your employer and sent directly to HM Revenue and Customs (HMRC).
You will need to have a National Insurance Number before you start paying National Insurance Contributions; this is usually sent out to you before your 16th birthday. The number is set by the Department for Work and Pensions, is unique to you and can be used to identify the contributions that you have paid.
The amount of National Insurance and Income Tax you pay depends on how much you earn. You will start paying national insurance if you’re over 16 and are either an employee earning above £242 a week or self-employed and making a profit of £6,725 or more a year. If you earn between £123 and £242 a week nothing is deducted from your wages and your contributions are classed as being paid to protect your National Insurance record. If you earn more one month you will pay more National Insurance and Income Tax.
If you work for an employer, you will be given a payslip that should show you what money has been taken from your wages and what it is for. You will see how much National Insurance and Income Tax has been deducted on your pay slip. At the end of the tax year, you should be given a P60, which will show the national insurance and income tax that you have paid over the year. You must keep these documents safe as they are important and you may need them to prove that you have paid. A tax year starts on 6th April and finishes on 5th April the following year.
National Insurance Classes.
In the 2023 Autumn statement the Chancellor of the Exchequer announced three changes to National Insurance Contributions. The changes are highlighted below in bold.
There are 4 different types of National Insurance. The type you pay will depend on your employment status and how much money you earn. How much you’ll pay in National Insurance depends on what kind of National Insurance you’re paying. If you have an employer, you’ll pay Class 1 National Insurance Contributions. It is the responsibility of your employer to pay your contributions out of your wages as well as their contributions of 15.05% towards your National Insurance. If you are self-employed your National Insurance contributions will be worked out based on your Self-Assessment tax return.
There are four main classes of National Insurance:
• Class 1 is paid by employees and employers
• Class 2 is paid if you’re self-employed. From 6th April 2024 this requirement will be removed and there will be no class 2 National Insurance.
• Class 3 is a voluntary contribution
• Class 4 is paid if you’re self-employed and have profits over a certain amount
Class 1 National Insurance Rates
If you are an employee you start paying National Insurance when you earn more than £190 a week (2022/23). This amount will stay the same.
The National Insurance rate you pay depends on how much you earn, and is made up of:
• 13.25% of your weekly earnings between £190 and £967 (2022/23). On 6th April 2023 this went down to 12% and from 5th January 2024 will go down to 10%.
• 3.25% of your weekly earnings above £967. In November 2022 this went down to 2% and will stay at this rate.
For example, if you earn £1,000 a week, you pay:
• nothing on the first £190
• 13.25% (£102.95) on the next £777. From 5th January 2024 you will pay £77.70.
• 3.25% (£1.07) on the next £33. You will now be paying £0.66
Class 2 National Insurance rates
From 6th April 2024 this will no longer be required.
You will need to pay Class 2 contributions if your profit for the entire tax year is £6,725 or more. These are set at a flat rate weekly contribution of £3.15, for every week or partial week of self employment in a tax year.
If you make less that £6,725 profit in the tax year paying Clklass 2 contributions is voluntary. Paying Class 2 National Insurance contributions, even if your profits are lower, can still help you build contributory entitlements to benefits.
Voluntary ‘Class 3’ National Insurance rates
Class 3 voluntary National Insurance contributions are designed to fill in any gaps in your National Insurance record. The aim is to get you a higher State Pension.
To receive the full new State Pension, you’ll need to have at least 35 qualifying years of National Insurance contributions. It’s payable to people who have reached their State Pension age on or after 6 April 2016.
Anyone with less than this will receive a reduced State Pension. To receive the new State Pension you need to have a minimum of ten qualifying years.
If you don’t have enough qualifying years, you might want to pay Class 3 voluntary contributions to boost your pension entitlement.
In 2023-24, Class 3 contributions are payable at a weekly rate of £17.45. This is the maximum you can pay each week. Rates for previous tax years will be different.
You might not always be able to pay Class 3 contributions for a tax year.
If this is the case it is important for you to find out if you can make payments towards any gaps, how much you’ll need to pay and if you will benefit from making any voluntary National Insurance contributions.
Class 4 National Insurance rates
If you’re self-employed and make profits of £12,570 or more in 2023-24, you’ll pay Class 4 National Insurance contributions. If you’re over this threshold, you’ll pay 9% on profits between £12,570 and £50,270 in 2022-23. On 6th April 2024 this will go down to 8%.
When do you stop paying National Insurance?
If you’re employed, you stop paying Class 1 National Insurance when you reach the State Pension age.
If you’re self-employed you stop paying: Class 2 National Insurance when you reach State Pension age and Class 4 National Insurance from 6 April (start of the tax year) after you reach State Pension age.