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.
Understanding 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.
Paying NI through a national insurance number
After explaining in detail what the national insurance number is. The next crucial question that might arise in one’s mind is why do you need to pay National Insurance?
Well for starters, paying National Insurance entitles you to some state benefits. The benefit count majorly depends on your employment factors. Hence, the state benefits will be varying whether you’re employed, self-employed or making voluntary contributions.
The duration of paying the national insurance is defined and one has to pay for a certain amount of years to be entitled to receive the state pension. In case, one hasn’t met the criteria of payment for example the minimum amount of contributions has not been paid then the individual will not be qualifying for some benefits.
Eligibility to apply for a national insurance number
You can apply for a National Insurance number if you live in the UK and have the right to work in the UK. You must also be looking for work or have an offer to start work in the UK. If you have already started working you can still apply. The citizens are eligible to apply under the following condition of fulfillment.
- The citizen has lost his/her National Insurance number
- The citizen is a UK resident aged 19 or under
- The citizen has a biometric residence permit (BRP)(external link opens in a new window/tab) which has a National Insurance number printed on it
- The citizen is only applying for a National Insurance number because he/she wants to apply for benefits or a student loan
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.
Apply for a national insurance number online
You have a National Insurance number to make sure your National Insurance contributions and tax are recorded against your name only. It’s made up of letters and numbers and never changes. You can find your National Insurance number:
- on your payslip
- on your P60
- on letters about your tax, pension, or benefits
- in the National Insurance section of your personal tax account
You can apply for a National Insurance number if you do not have one or find your National Insurance number if you’ve lost it. These organizations need to know what your number is:
- HM Revenue and Customs (HMRC)
- your employer
To prevent identity fraud, keep your National Insurance number safe. Do not share it with anyone who does not need it. You can save or print a letter confirming your National Insurance number from your personal tax account. If you do not have a personal tax account, contact HMRC to ask for a letter.
Proof of national insurance number
Providing evidence and proof of national insurance numbers can be somewhat confusing as notifying its presence can get hectic for many people. However, showcasing the proof of national insurance number is surprisingly easy and one ought to follow the following steps.
- Required documents include P45 or P60 and letter from HM Revenue and Customs about tax or tax credit
- The detailed bank statements show payments by direct debit for class-2 National Insurance contributions. Further, benefit payments received showing your NINo on the statement are also required. Examples are Incapacity Benefit or State Pension.
- Payslips, salary statement or works pension statement (as long as it shows your NINo).
- The letter that the Pension Service or Jobcentre Plus has sent to you (not handwritten).
- NINo card (not handwritten).
The following example is not a full list; rather , they require one document to confirm the National Insurance number and one to confirm your partner/spouse’s National Insurance number if you have been married.
Lost my national insurance number
In case you are yet to get familiar with the complicated language of insurance numbers, the quickest and easiest way to find it is online through your personal tax account or you can also put it on any official document like a payslip or P60.
The HM Revenue and Customs (HMRC) will not tell you your National Insurance number over the phone. If you call them, it can take up to 15 days to get a letter with your National Insurance number. Despite following the official protocol, there are instances when you are still unable to find the national insurance number.
In that case, you can fill in form CA5403 and send it to the address on the form. Further, you can contact the National Insurance numbers helpline and answer some questions. It is pertinent to mention that HMRC no longer sends out National Insurance cards.
How can I find my national insurance number online?
Normally, the National Insurance (NI) number will be sent to the citizens just prior to their 16th birthday. However, in case you have lost your NI number, it’s not the end of the world. Thankfully, there are several ways to find it again and in fact, you can also dig in online whilst searching for your national insurance number.
Ever since the pandemic, the world has successfully moved toward the online tech world and takes refuge in completing tedious tasks in the comfort of their home. So, how can I find my national insurance number online? Firstly, the person who has lost his national insurance number can check the number using his/her online Personal tax account or on the HMRC App. Initially, when you log into a website, a series of questions will be asked to confirm your identity that I am indeed the person or a scammer or hacker.
In case you fail to answer the questions correctly, you will be directed to try again. In the best-case scenario, you will be directed in and then you can view, share or print a copy of your NI number confirmation letter. Moreover, there is a possibility to look back through old records whilst you pursue the search for your missing national insurance number. You’ll find your NI number on many documents you’ll have received from your employer or HMRC. Check old payslips, P60s, or any letters about tax, pensions, and benefits.
It can also be requested by post after completing an online form on the HMRC site. There’s also an HMRC phone line that can send your number by post if you would rather do that – see the National Insurance Number Helpline for more. However, one is advised to be mindful of such alert companies that promise to provide your national insurance number online in return for a fee. It is pertinent to mention that getting your national insurance number is free and it is issued by HMRC.
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 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 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.
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.
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.
National insurance credits
Further, we discuss the terminology ‘National Insurance credits’ and how the following work on a larger scale. National Insurance credits are an easy way of maintaining your National Insurance record when you are not making National Insurance contributions. The aforementioned credits will help facilitate the individual to build up ‘qualifying years’. The following qualifying years will be counted towards your entitlement.
Entitlement to national insurance credits
After the birds-eye view of National Insurance credits, we now dive into the intricacies and working of these credits. The general notion explains that the people who are qualified and meet the criteria of the credits are not making the contributions because they are not in paid employment.
The reason behind discounted employment can be listed as personal and professional reasons both. The possible reasons include maternity/paternity leaves, prolonged illness, unemployment, or other private reasons.
Moreover, citizens are also eligible and can receive National Insurance credits when they are on an approved training course or busy performing jury service. National Insurance credits are divided into two categories. The two types are discussed in detail below.
- Class 1 covers State Pension and bereavement benefits along with other benefits like Jobseeker’s Allowance or Employment Support Allowance.
- Class 3 credits only count towards your State Pension and bereavement benefits
Increase in national insurance
Inflation has emerged as a new war forefront after battling the coronavirus. The National insurance contributions will rise from April 2022. The increase has been made to fund a health and social care levy. Everyone including the employees, employers, the self-employed, and pensioners will be hit by higher tax bills. Earlier, the pensioners were not required to pay national insurance after reaching the state pension age.
However, according to the new rules, everyone will have to pay the new levy on their earnings if they are still working from April 2023.
Advantages of national insurance number
The national insurance number will facilitate NI contrition which has a plethora of benefits. Below 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
In conclusion, the national insurance number makes sure that the National Insurance contributions and taxes you pay are properly recorded on your account. It also acts as a reference number for the whole social security system. The following healthcare policy does cater to citizens’ ease and adjustability. The contribution of headstart can be easily termed the driving force that will in the future provide state benefits. The series of National Insurance contributions and credits can be easily sorted and dealt with to avoid further complications.