How Is National Insurance Calculated? What to Do What Not to Do?
Amidst the financial crisis, understanding national insurance holds prime importance. If you have frantically googled about NI rise from April 2022, follow this article to understand how national insurance is calculated.
National insurance (NI), like income tax, is one of those deductions we’re mostly aware of as it impacts our pay. Despite the distant familiarity, most of us don’t know how it’s calculated. Insurance payments and finances are bound to get mind-boggling and keeping up with mathematical calculations can get very tiresome. However, the business of National Insurance is surprisingly easy to grasp.
Eliminating the constant fret and worry, the breakdown of the payment of National Insurance is admirably straightforward. Once you are 16 and earn a certain amount, you are bound to pay National Insurance contributions. National insurance is a tax on ‘earned income,’ and NI is paid in both conditions, if you are an employee, or if you’re self-employed.
NI will facilitate building your entitlement to multiple benefits including the crucial ones like the State Pension and Maternity Allowance. If you’re sixteen or over, you must pay national insurance if you’re an employee or are self-employed and turn a profit.
In case you hold some doubts about the process of why and how is national insurance calculated, you might have a burgeoning list of queries about what is national insurance, and rightly so. The complexities about how it works, how much is national insurance, how much you have to pay, how to calculate national insurance and much more can be puzzling.
To answer all your questions and concerns, this article will tackle all the salient features and aspects of national insurance in detail. Further, information regarding legal and financial intricacies is also involved, so continue reading to enhance your knowledge about how national insurance is calculated.
Defining national insurance
National insurance is defined as a tax on earnings paid by both employees and employers who are also counted as the people who are currently self-employed. Introduced back in 1911, the insurance aims to provide a fund for workers who lost their job or needed medical treatment.
Currently, the national insurance is used to pay for the NHS benefits, alongside the state pension The government can also borrow from the National Insurance Fund to pay for other projects. Moreover, the tax payment can help to build your entitlement to benefits depending on whether you are employed or self-employed. So how is national insurance calculated?
Determining national insurance can be somewhat tricky since a plethora of social security providers majorly depends on the people who pay national insurance aka the national insurance contributions. Factors like employment status, age, level of earnings, and much more can have diverse effects on the level of national insurance contribution that is required to be payable.
History of national insurance contributions
Before delving into the financial jargon, let’s glimpse into the background of how the national insurance contributions came into existence. Since its inception, many noticeable changes have occurred. The current system of NI in the United Kingdom began with the National Insurance Act of 1911. Initially, the national insurance was only limited to a government-funded unemployment benefit.
Back in the day, all the health insurance and pension benefits were administered by private trade unions and “approved societies,” or professional associations. There was an old-age pension that was paid to people over age 70. It is pertinent to mention that life expectancy was lower at that time and only one in four Britons lived that long.
In the early 90s, the second world war was nearing its end by the time the government began contemplating an expansion of the social safety net in Great Britain. Prime Minister Winston Churchill announced in March 1943 that there will be a “national compulsory insurance for all classes for all purposes from the cradle to the grave.”
The national insurance system was fully in place in 1948 and since then it has periodically been revised depending on the financial standpoint of the country. Now, the employees pay the National Insurance rate from age 16 through the official retirement age, which is age 65 for most but has now been gradually increased to age 67.
What does national insurance pay for?
The main idea behind National Insurance payments was to provide a government safety net for workers who faced financial crises. The employees paid money into the scheme out of their wages. Back in the day, the citizens who required money for medical treatment or were facing unemployment could claim. However, now the system has been significantly altered and an abundant amount of modifications have been made. Now, the question arises what does national insurance pay for?
Currently, National Insurance is used to pay for The NHS primarily. The National Health Service (NHS) is a publicly funded healthcare system. Moreover, NH also pays for unemployment benefits, sickness and disability allowances, and the state pension.
How is national insurance calculated?
After delving into details about the significance and advantages of paying the national insurance, how much you have to pay might sound a tad bit confusing. Keep aside the overwhelming sentiments of being plundered into a rigmarole, such emotions can be easily eliminated; the calculations are not as hard as they seem. In simple words, the amount you’ll pay in National Insurance depends on the type and kind of National Insurance you’re paying.
Dividing into categories, there are four main classes of National Insurance that determine the amount that needs to be paid.
Class 1 – Paid by employees and employers
Class 2 – National Insurance for self-employed
Class 3 – Paid by voluntary contributors
Class 4 – Paid when you are self-employed and have profits over a certain amount
Class 1 – If you are employed, how much to pay?
Class 1 deals with the National Insurance Rates in the case that the individual is employed or is an employer. Let’s understand the entire process of payment through a simple example that will focus on the employee’s salary and the deduction due to National Insurance. Suppose that you are earning more than $184 per week and you start to pay national National Insurance. We have already concluded that the National Insurance rate that one has to pay depends on how much you may earn. Hence, the following is the breakdown of the required payment below:
12% of your weekly earnings are between $184 and $967 and 2% of your weekly earnings are above £967.
Now, for example, you have a monthly salary of 1,000 a week. You will be paying
- nothing on the first £184
- 12% ($93.96) on the next $783
- 2% ($0.66) on the next $33.
It is pertinent to mention that as an employee your National Insurance contributions stop when you reach the State Pension age. Class 1A or 1B deals with employers who pay these directly on their employee’s expenses or benefits
Class 2 – National insurance self-employed
Class 2 contributions are paid by people who are self-employed and do not work under any company. Class 2 National Insurance contributions are set at a flat-rate weekly contribution of £3.05/week in 2020-21 and 2021-22.
Hence, the self-employed citizens have to pay every week or partial week of self-employment in a tax year. The following case is valid if the profits of the entire tax year are the Small Profits Threshold or greater in 2021-22.
In the instances where the profits are below the Small Profits Threshold, paying Class 2 contributions is voluntary for self-employed people. It is important to mention that if the self-employed people are paying the Class 2 National Insurance contributions despite low profits, it can still assist in building contributory entitlements to benefits.
Class 3 – Voluntary national insurance rates
After employees and self-employed, the next comes the Class 3 voluntary National Insurance contributions. This division is designed and created to fill in the possible gaps in a citizen’s National Insurance record.
The major aim of Class 3 voluntary National Insurance contributions is to provide the individual with a higher state pension. Furthermore, the higher state pension can be achieved by fulfilling certain criteria where the first and foremost requirement is that an individual needs to have at least 35 qualifying years of National Insurance contributions.
In case one has not fulfilled the required hours, then he/she will receive a reduced State Pension. The new State Pension requires that the person has a minimum of ten qualifying years. Those who have not completed enough qualifying years are advised to pay Class 3 voluntary contributions to boost their pension entitlement.
As for the previous statistics, Class 3 contributions were payable at a weekly rate of £15.40 in the year 2021-22. Moreover, there is a possibility that one might not always be able to pay Class 3 contributions for a tax year. Hence, it is essential to conduct detailed research on the concerning topics regarding whether one can make payments towards any gaps or how much you are required to pay.
Class 4 – National insurance rates
Last but not the least, we have an insight into the national insurance rate in the case where you are self-employed and make high profits of a certain amount. The self-employed people who are earning well alongside handsome profits will be paying Class 4 National Insurance contributions.
Here we discuss a fairly easy example to gain insight into the mathematical working and logical aspects of the payments. Assume that you are self-employed and your profit gain is over a certain threshold (as described in the criteria), then you will be paying 9% on profits between £9,559 and £50,270 in 2021-22 and 2% on profits over £50,270.
Married woman – National insurance contributions
Now, how much is national insurance for a married woman? Back in 1977, married women were allowed to make National Insurance contributions at a reduced rate. The following course of action made them stop building up entitlement to the state pension. This way they relied on their husband’s National Insurance contributions record.
The following dependence was termed as the ‘married woman’s stamp’. Majorly, the female who opted for the above-mentioned option could continue to make reduced National Insurance contributions. In the other case, they could pay at the full rate and gradually build up individual pension entitlement. With reduced contributions, their maximum entitlement is currently 60% of basic state pension.
However, things have changed now. Women in such positions who have yet to reach state pension age are no longer eligible since 2016. The pension entitlement is currently depending on the number of qualifying years’ national insurance contributions they have made in their own right.
Do you legally have to pay national insurance?
Is paying national insurance compulsory and legal? Yes, every citizen earning income is bound to pay national insurance but there are two approaches to this insurance process. The first case is that if the income tops the relevant threshold, then paying national insurance is mandatory. For the people who are employed in an organization, this will be an automated process as the PAYE system is authorized to deduct the tax. So NI and income tax are taken off the gross salary by the employer, before reaching the employees’ bank account.
As for other occurrences, the population who is self-employed and fills in a self-assessment tax return, then HMRC will calculate their national insurance tax and the amount that is required to pay will be specified. The HMRC will let the self-employed people know how much they owe when it’s due and how to pay as part of the process and information evaluation.
If you’re still working later in life, you won’t have to pay NI if you work beyond the state pension age. But you may still be liable for income tax if your earnings and income from other sources top your annual tax-free allowance of £12,570.
What do national insurance contributions pay for?
After you have analyzed the answer how is national insurance calculated, next come the benefits that NI pays for. Here are the benefits which depend on national insurance contributions NIC:
- Maternity Allowance
- Contribution-based/New Style Jobseeker’s Allowance (JSA)
- Contribution-based/New Style Employment and Support Allowance (ESA)
- Bereavement Benefits
- Basic State Pension
- New State Pension
Here, we list down a plethora that does not depend on national insurance contributions NIC:
- Attendance Allowance
- Disability Living Allowance (DLA)
- Personal Independence Payment (PIP)
- Child Benefit
- Guardian’s Allowance
- Universal Credit
What is my national insurance number?
National Insurance numbers are set by the Department of Work and Pensions. Every number that is assigned to the contributors is unique. The NIN usage is primarily for identification purposes so that the government keeps track of how much tax has been paid. It is important to mention here that the threshold is due to increase from July 2022, following Chancellor Rishi Sunak’s Spring Statement. The new limit that has been specified for an employee will be £12,570 per year. Before you can start paying NI, you’ll need a national insurance number. This is your own unique number, with a combination of letters and numbers, which is sent to you by the Department for Work and Pensions. You get one for life, and it makes for an easy way for HMRC to track your tax and NI payments over the years, along with benefits and state pension entitlement.
Furthermore, It also keeps a thorough and detailed check regarding how much state pension one might owe or facilitates tracking of the tax allowance. Delving into details about the assignment process, every person is only assigned one National Insurance number and the same number is utilized throughout the person’s lifespan.
As for the format of the National Insurance number, it mainly comprises three categories namely two letters, six numbers, and a final letter. The following national insurance number will determine how much is national insurance you are required to pay to achieve the state pensions.
How does one apply for a national insurance number?
The National Insurance Number is automatically allocated to an individual when he/she turns 16. Otherwise, the application process of the number can be initiated by following these steps.
- If you have not received your National Insurance Number and you are under the age of 20, call the National Insurance number helpline (0300 200 3500).
- If you are older than 20, call the National Insurance application line on 0800 141 2075.
Moreover, the office is only open Monday to Friday. The only document required is that you must have your ID. For issuance, an interview might as well be conducted for official protocols.
What percentage is national insurance?
We can safely conclude that anyone who earns income in the UK requires to pay National Insurance (NI) – whether they are employed or self-employed. The hefty amount will be paid
The amount you pay will vary depending on your income and employment status.
National Insurance Contributions (NIC) are taxes paid by British employees and employers to fund government benefits programs, including state pensions. The contributions are made through payroll deductions. However, the percentage of national insurance varies and is determined through the classes in which people are divided owing to their employment status.
Class 1 – The employees who earn more than £183 per week and are under State Pension age a year fall under the Class 1 category. The employer deducts NI through PAYE and the percentage of national insurance is 12%.
Class 1A or 1B – The employers for employees earning over £183 per week fall in the category of Class 1A or Class 1B. The employer pays it on top of Class 1 and the percentage of national insurance are 13.8%
Class 2 – The class 2 division includes all the self-employed people who are earning over £6,515 a year. They are evaluated through a self-assessment tax return and they don’t have a percentage rather a flat rate of £159 per year
Class 3 – Class 3 includes all the voluntary contributions. The people falling under this category can pay to fill gaps in the NI record. The amount required to pay is £15.30 per week
Class 4 – The class 4 division includes all the self-employed people who earn a certain amount of profit. The range that has been specified is over £9,568 a year. The NI is calculated with the help of a Self Assessment tax return. The percentage of national insurance is fixed at 9%.
Working part-time and national insurance
National insurance is a tax on ‘earned income’ – so that’s money you get through paid work, not from anything you earn in the way of interest or profits on savings or investments. Before you can start paying NI, you’ll need a national insurance number. This is your own unique number, with a combination of letters and numbers, which is sent to you by the Department for Work and Pensions.
In the aforementioned paragraphs, we have discussed in detail the amount of income tax and national insurance the employed class has to pay. Now, we will be discussing the route one has to follow if they are working part-time or earning a lower income than the predefined threshold.
If you have earnings above the lower earnings limit and below the primary threshold (£184 per week or £797 per month for 2021/22), in that case, you will not have to pay any Class 1 NIC. However, your NIC record will be credited considering you have paid Class 1 NIC at a zero rate. While this might earn you entitlement to contributory benefits and the state pension, you might be unable to avail of some other benefits.
On the other hand, if you earn less than the lower earnings limit (£120 a week for 2021/22) then you pay no Class 1 NIC and you do not avail any benefits attached to the NIC record. Paying NIC through at least one job will help you to qualify for the state pension and certain other contribution-based benefits. You can find out more about the state pension on the GOV.UK website. You will need 35 qualifying years’ worth of contributions to get the full amount of the state pension. You have until you reach the state pension age to make those contributions.
Unemployment and NI credits
Unemployment and NI credits scenarios have also been dealt with with utmost care as according to the standards, the people who receive Universal Credit will automatically qualify for Class 3 National Insurance credits. For the job seekers or potential candidates, they are eligible for Class 1 credits. The following credits will be automatically added to your record if he/she is receiving Jobseeker’s Allowance.
In case an individual is unemployed and not receiving Jobseeker’s Allowance, they are advised to claim the Class 1 credits via your local Jobcentre. If you’re sent by a JobCentre Plus, the credits will be added automatically. There are other interesting options to successfully avail the Class 1 credits. If you attend a government-approved training course that’s less than one year long, you can avail of the credits.
I lay down my case by concluding that the complex jargon of national insurance can be confusing however the process is quite simple. The calculation of national insurance entirely depends upon employment status and how much an individual earns. The following healthcare policy caters to citizens’ ease and adjustability. The process of credits and transactions fall into a perplexing rigmarole and the benefits surely facilitate the citizens in retirement.