What Is National Insurance: A Worker’s Guide
Are you a citizen of the United Kingdom and start working in the country? Here is what you need to know about national insurance that you are required to pay as you embark on your earning journey.
The National Insurance (NI) system was introduced in 1911 by the UK government to provide assistance to workers who were sick and unemployed. A series of amendments were introduced afterward to extend its reach to add funding for the National Health Service, unemployment benefits, and retiree pension plan. The UK citizens pay their share of NI contributions to build up entitlement overtime for late payment.
In 2020, the rate was 12% of the worker’s weekly earnings between the equivalent of about $220 a week and about $1,200, which dropped to 2% above that maximum. Employers can make voluntary additional NI contributions if they want higher pension amounts. Self-employed people and UK citizens working out of the country can also make voluntary contributions in order to qualify for the state pension.
If you have just started working in the country and are liable to pay national insurance, you should thoroughly understand what national insurance is and how it works in your case. This article will help you know everything about the national insurance contributions and their potential benefits.
What is national insurance?
National insurance serves as a fundamental component of the welfare state in the United Kingdom that acts as a form of social security. The payment of the national insurance establishes entitlement to certain state benefits for workers and their families. The legislation of the National Insurance Act was passed in 1911 and expanded by the Labor government in 1948 and went through many amendments in the succeeding years.
Initially, the payment was subject to providing insurance against illness and unemployment, but it eventually got fold retirement pensions and other benefits. Currently, workers begin to pay contributions from the age of 16 until they become eligible for the State pension. Contributions are due from employed people’s earnings at or above a threshold called Lower Earnings Limit (LEL). Its value is reviewed every year.
Self-employed people contribute partly by fixing weekly or monthly payments and partly on a percentage of net profits above a threshold. It is reviewed periodically. Some people may also make voluntary contributions to fill a gap in their contributions record and thus protect their entitlement to benefits.
HM Revenue and Customs (HMRC) collect the contributions. Employees have to pay through the Pay As You Earn (PAYE) system along with repayments of student loans, income tax, and any Apprenticeship Levy which the employer is liable to pay. The UK government makes a significant proportion of revenue out of the contributions, raising around 145 pounds in 2019-20, which represents 17.5% of all tax revenue.
The benefit component includes many contributory benefits, availability and amount of which is determined by the claimant’s contribution record and circumstances. Weekly income and some lump-sum benefits are provided for participants upon death, unemployment, maternity, retirement, and disability. To get the benefits related to national insurance, a national insurance number is required.
The National Insurance Contributions (NICs) are paid by both employers and employees on earnings, and by employers on certain benefits-in-kind provided to employees. Self-employed pay partly contributions as mentioned above. Individuals can also make voluntary contributions, in order to fill a gap in their contribution record and hence protect their entitlement to benefits.
People with special circumstances such as caring for a child, caring for a severely disabled person for more than 20 hours a week, or claiming unemployment or sickness benefits, get national insurance credits which protect their right to various benefits.
National insurance contributions fall into a number of classes, each having its specified responsibilities to pay. Class 1, 2, and 3 NICs paid are credited to an individual’s NI account, which determines eligibility for certain benefits such as the state pension. Class 1A, 1B, and 4 NIC do not count towards benefit entitlements but must still be paid if they are due.
Employers and their employees pay class 1 contributions. The law defines contributions paid by employers as “primary” contributions while that by an employee is called “secondary” contributions but they are usually referred to simply as employee and employer contributions. The employee contributions are deducted from gross wages by the employer, which requires no action by the employee.
The employer then adds in their own contribution and remits the total to HMRC along with income tax and other statutory deductions. Contributions for employees, on the other hand, are calculated on a periodic basis, usually weekly or monthly depending on how the employee is paid, without any reference to previous periods.
Contributions on company directors are calculated on an annual basis, to ensure that the correct level of NICs are collected regardless of how usual the director selects to be paid. There are a number of milestone figures which conclude the rate of NICs to be paid. These include Lower Earnings Limit (LEL), Primary Threshold (PT), Secondary Threshold (ST), and Upper Earnings Limit (UEL), though most of the time PT and ST are set to the same value.
The cash value of most of these figures normally changes each year either in line with the inflation or by some other amount decided by the chancellor. The PT is normally indexed to inflation using the CPI, while other thresholds remain indexed using the RPI. Here is the list of due contributions:
- On earnings below the LEL, no NICs are paid because no benefits accrue on earnings below this limit
- On earnings above the LEL, up to and including the UEL, NICs are collected at a rate that is determined by a number of factors:
- Whether the employee has reached the age at which State Pension becomes payable
- Whether the employee is an ocean-going mariner or deep-sea fisherman
- Whether the employee is a married woman paying reduced-rate contributions. This facility was abolished in 1977 but women who were already paying these contributions at that time were allowed to opt to continue to do so for as long as they remained married and in employment,
- In the case of the employer contribution, whether the employee is aged under 21 or is an apprentice aged under 25.
- On earnings above the LEL, up to and including the PT, employee contributions are not paid but are credited by the government as if they were. It enables certain low-paid workers to qualify for the benefits.
- On earnings above the LEL, up to and including the ST, employer contributions are not paid.
- On earnings above the UEL, yet another set of rates apply, this time depending only on whether the employee has reached the age at which State Pension becomes payable or is an ocean-going mariner or deep-sea fisherman.
The government introduced Class 1A contributions in April 1991 that made employers pay on the value of company cars and certain other benefits in case, provided to their employees and directors, at the standard employer contribution percentage rate for the tax year. Class 1A contributions do not extend any benefit entitlement for individuals.
Class 1B contributions were also introduced in the same year and made employers pay as part of a PAYE Settlement Agreement; an arrangement whereby the employer meets the tax liabilities on certain benefits. The rate of contributions of class 1B is the same as for Class 1A and they do not provide any benefit entitlement for individuals.
Contributions are paid by self-employed individuals and are fixed on a weekly basis. The contributions are due regardless of profit or loss but those with very low earnings can apply for exemption from paying and those on high earnings with liability to either Class 1 or 4 can apply for deferment for paying.
From the start of 2020, self-employed National Insurance Contributions (NICs) are categorized as Class 2 given that they earn between 6,365 pounds and 8,631.99 pounds a year. Those who earn between 8,632 or more are categorized as Class 4. The charges for Class 2 contributions are 3 pounds per week and are usually paid by direct debit.
While the amount is calculated on a weekly basis, they were typically paid monthly or quarterly until 2015. After that class 2 contributions are collected as part of the tax self-assessment process. Unlike class 1, they do not form part of qualifying contribution record contribution-based jobseekers allowance, but count towards Employment and Support Allowance.
These contributions are voluntary NICs paid by people wishing to fill a gap in their contributions record which has been raised either by not working or by their earnings being too low. Class 3 contributions only count for Bereavement benefits and state pension.
The main aim for paying class 3 contributions is to make sure that a person’s contribution record is preserved to provide entitlement benefits. Though one should take care not to pay unnecessarily as it is not important to have contributions in every year of working life in order to qualify.
Self-employed individuals pay class 4 contributions as a portion of their profits. The due amount is calculated with income tax at the end of the year, based on figures supplied on the SA100 tax return. The set contributions are based around two thresholds; the Lower Profits Limit (LPL) and the Upper Profits Limit (UPL). The cash value for both of these portions is the same as the Primary Threshold and Upper Earnings Limit used in Class 1 calculations.
- No class 4 NICs are due on profits up to and including the LPL.
- Above the UPL, class 4 NICs are paid at a second rate, which has been 2% for several years
- Above the LPL, up to and including the UPL, class 4 NICs are paid at a rate which can be different but has been 9% for many years.
These contributions do not form part of a qualifying contribution record for any benefits, including the State Pension, as self-employed people qualify for these benefits by paying class 2 contributions.
As mentioned above, the rates at which employers and their employees pay contributions to depend on a number of factors. That’s why there are many possible sets of employer/employee contribution rates to allow for all combinations of many factors. HMRC sets a letter of the alphabet, referred to as an ‘NI Table Letter’, to each of these sets of contribution rates.
Employers have the responsibility to allocate the correct table letter to each employee depending on their specific circumstances. HMRC publishes look-up tables for each table letter to assist with the annual calculation of contributions, every tax year. Though now most of the calculations are done by computer systems and the tables are available only as downloads. Besides, HMRC provides an online National Insurance Calculator.
What are voluntary contributions?
If you are not working or getting NIC credits, you can pay voluntary NIC in specific circumstances. For instance, Class 3 contributions can be paid on a voluntary basis in case an individual leaves the UK so that they can continue to build a UK state pension. In order to be able to pay Class 3 NIC on a voluntary basis, when you leave the country, you need to fulfill either of the following conditions:
- You have lived in the UK for a continuous three-year period at any time before the period for which NIC is liable to be paid. If you have lived or worked in another EEA country or in Turkey, time spent there would help you to meet this condition.
- Before you left the country, you paid a set amount in NIC for three years or more.
You can also pay Class 2 NIC on a voluntary basis if you are in the UK. However, this is only applicable where you will be self-employed or employed abroad. Class 2 contributions are cheaper than Class 3 contributions and in fact, protect more benefits than Class 3, so if you want to pay NIC on a voluntary basis, and will be employed or self-employed in some form, while being overseas, it may be cheaper to pay Class 2 NIC.
Contribution rates are not static and the government revises them and sets them for each tax year. The general rates for the tax year 2021/2022 are in the list below. For those who qualify for the mariners’ rates, the employee rates are mentioned below and the non-zero employer rates are 0.5% lower than mentioned below.
|Weekly salary||Standard||Reduced||Over retirement age|
|Up to £120 a week||n/a||n/a||n/a|
|£120 to £184 a week||0%||0%||0%|
|£184.01 to £967 a week||12%||5.85%||0%|
|Over £967 a week||2%||2%||0%|
|Weekly salary||Standard||Reduced||Over retirement age||Under 21 / apprentice under 25|
|Up to £120 a week||n/a||n/a||n/a||n/a|
|£120 to £170 a week||0%||0%||0%||0%|
|£170.01 to £967 a week||13.8%||13.8%||13.8%||0%|
|Over £967 a week||13.8%||13.8%||13.8%||13.8%|
|Class 1A & 1B||13.8%||13.8%||13.8%||13.8%|
NICs and income tax
The workers of the United Kingdom are subject to pay two income taxes: income tax and National Insurance Contributions. NICs are paid over to HMRC along with income tax by employers and self-employed people. The important feature is the number of thresholds at which the overall marginal tax rate rises or falls.
This occurs partly because of the peculiarity in the income tax schedule, notably the withdrawal of the personal allowance once the income exceeds 100,000 pounds. But it also happens because of a lack of alignment between income tax and NICs. Currently, the upper earnings limit and the upper profits limit are aligned with the higher-rate threshold. But employee, self-employed NICs, and employer NICs are being paid at different levels of income.
Aligning thresholds within the current system matters less than it might be seen for simplification. As income tax and NICs are judged over different periods: annual for income tax, pay period for Class 1 NICs, and on different measures of income, it is quite possible for someone to be above the income tax higher-rate threshold but below the UEL, or vice versa, everywhere in the country.
As the process for both taxes is similar, it would be simpler to merge them together to make them more transparent and administratively less burdensome. If done so, most of the remaining differences between the two can be retained if that were considered desirable. For instance, a combined tax could be charged at a lower rate on items that are currently subject to one tax and not the other.
But the integration of both taxes would highlight the illogicality of most of the current differences between the two taxes and would provide an opportunity to remove them. Calls for such integration have been widespread over many years, but successive governments have not paid much heed to materializing it. But instead, there are gradual moves towards greater alignment between the two taxes, making them even more similar.
Who pays NICs?
As mentioned above, the government makes up to 20% of the revenue from National Insurance Contributions, from which, as estimated 58% comes from employers’ contributions. Employee contributions add a further 39%. Contributions paid by self-employed (comprising both Class 2 and Class 4 contributions) are relatively low and make less than 2.5% of contributions.
A key question, however, is the economic incidence of NICs: who takes the burden in the sense of lowering their living standards reduced by the tax. The answer is that the economic incidence of a tax is ultimately borne by real people.
When a business pays a tax, as with employer NICs, it could be felt by the firm’s owners, shareholders (via reduced profits from the business) or could be passed on to the firm’s workers (via lower wages), suppliers (via lower input prices), our customers (via higher prices). In practice, it ends up always being a combination of all of these.
Simple economic theory dictates that the incidence of employee NICs and employer NICs should be the same, at least in the long run. It is likely that the long-run incidence of both employee and employer NICs is predominantly on employees, but in practice, the evidence is not clear-cut.
The impact on overall household incomes, taking into account, for instance, the extent to which high earners tend to live together: that the impact of NICs on many low-income households is cushioned as their reduced net earnings result in higher entitlements to means-tested benefits; and in case employers pay lower wages as a result of having to pay employer NICs, those lower wages decreases the amount of income tax employees must pay.
On average, NICs decrease household incomes in the UK by around 4,200 pounds, equivalent to over a tenth of their average income. The higher-income households pay much more, not only in cash but as a percentage of their income, except that NICs reduce the incomes of the highest-income tenth of households by a smaller proportion than the 8th or 9th decile group, due to the fall in marginal NICs rates above the UEL and UPL.
Will I have to pay national insurance if I am working in the UK?
Most of the workers in the UK are liable to NICs as soon as they start working in the country and have a UK employer. Those people who are sent to the UK by their employers and are assigned to work here remain subject to their home country’s social security legislation rather than pay UK contributions. Similar rulings are applicable to a self-employed person who has come to work temporarily in the UK.
If you are employed in the UK on a local contract, then you are generally liable to UK NIC from the first day of your work, regardless of the country you are from. But If you remain employed overseas while working in the country, for instance, if you are assigned to the UK by a non-UK employer, the applicable rules depend on whether your home country is either:
- An EEA country or Switzerland, and you are within the scope of either the UK’s withdrawal agreement from the EU (and therefore the old co-ordinated rules on social security which applied across the EEA) or the new protocol on social security coordination between the UK and the EU.
- Any other country with which the UK has a social security agreement.
- Any other country in the world.
The EU Commission has issued some guidelines on who is in the scope of the agreement, but it is recommended that you seek advice according to your personal circumstances. In case the old co-ordinated EEA social security rules are not applicable, then you should consider whether the new protocol on social security coordination between the UK and EU applies instead. Your National Insurance position can stand in each of the above three cases as follows:
- EEA/Switzerland (where the old co-ordinated social security rules are applied or the detached worker provisions under the new protocol on social security coordination apply. You normally remain insured in your home country for the work of up to two years by default. Under the old rules, it is viable to be insured in your home country for up to five years.
- non-EEA/Switzerland country with which the UK has a social security agreement. Usually, you remain insured in your home country for the period specified in the agreement.
- It is for the rest of the world, where you normally are exempt from the UK NIC for the first 52 weeks.
What is a National Insurance number and what is it for?
A national insurance number is a form of individual tax identification that allows the taxes collected from an individual to be associated with them to demonstrate their eligibility for certain state benefits. National insurance payments can help you fund the benefits such as state pension, maternity and paternity leave, and statutory sick pay. From April 2022, the national insurance increase will also contribute to the NHS and social care.
The national insurance payment falls in Class 1 and it all depends on a person’s employment status. People who are employed and are under state pension age are subject to pay Class 1 contributions. As mentioned above, Class 1 includes further subclasses 1A and 1B, which must be paid by employers on certain employee benefits such as company cars and health insurance, as well as some other lump sums such as redundancy payments.
How to apply for a national insurance number?
Typically, anyone who wants to work in the UK needs a national insurance number. Employees start contributing as they start earning over 184 pounds a week, or 6,515 pounds a year if they are self-employed. HMRC and the Department for Work and Pensions (DWP) use national insurance numbers to identify individual contribution records. So, how do I get a national insurance number?
Every citizen of the UK receives their national insurance number at the age of 16. The number will appear on all payslips, P60s, and P40s received by an employee. In case you lose your NI number, you can visit the gov.uk website to apply for the number. Once you apply, you should get your NI number within 15 working days. There is no fee for applying for the NI number, you can apply for an NI number if you live in the country and have the right to work.
What is the national insurance employment allowance scheme?
The national insurance employment allowance scheme makes employers eligible to reduce their NI liability by up to 4,000 pounds. You can claim on the employment allowance scheme if your Class 1 liabilities are around 100,000 or less in the previous tax year. Only those who pay Class 1 national insurance are eligible to apply for the scheme which lasts until the tax year is up, or until the 4,000 has been spent.
You don’t have to have NI liability of over 4,000 pounds to be eligible to apply, in that case, you have to apply again as the tax year ends. The scheme aims to support small businesses by lifting some of the obligatory employer tax contributions. For instance, it can go some way in alleviating the impact hiring new team members may have on your expenses and profits.
How to apply for NI employment allowance?
There are two ways you can apply for NI employment allowance or you can visit gov.uk to get more information on applying. Prepare all your documents and get the information on what is required. Here are these ways you can use:
Using your in-house payroll software
Applying via your in-house payroll software, you need to fill out your HMRC employment payment summary (EPS) as normal. Then go to the “employment allowance indicator” section and mark ‘yes’. Select business sectors that apply to your business.
Using HMRC’s PAYE software
- Go to HMRC PAYE software
- Select your name on the ‘employer’ menu
- Go to ‘change employer details’, then choose ‘yes’ in the ‘employment allowance indicator’ section
- Choose ‘yes’ on ‘Do state aid rules apply?’, if you intend to sell goods or services. If not, choose ‘no’ and then select ‘state aid rules do not apply.
- Fill out and send your EPS as normal.
- National insurance doesn’t have to be complicated or tiring, but as a small business owner, it’s good to know how’s and why’s, so you can answer any questions your employees might have.
- It is also important to know exactly where your money is going, that is why Square’s POS system helps you keep on top of stock, staff, income, and outgoings, all in one place.
FAQs about national insurance
● What does national insurance pay for?
Although national insurance works in a similar way with income tax, only the money paid for this type of insurance goes into a government fund which is being used for a number of things including state benefits such as statutory sick pay, state pension, and maternity leave. To qualify for these benefits you are liable to pay national insurance benefits for a set period, if not, it is possible to make voluntary contributions.
● How to check your national insurance record?
You can track how much do you have paid in national insurance any time online through the government website, you can get details such as
- All national insurance payments you have paid throughout your life
- Any gaps in contributions such as years when you didn’t pay national insurance
- If you have received any national insurance credits and how much they are worth
- How you can pay voluntary contributions and how much they will cost
● What happens if I don’t pay national insurance?
If you are liable to pay national insurance but for some reason, you couldn’t make a payment, HMRC will usually contact you. They can send you a letter and explain that the payment is late, and how to pay your dues and when. It will describe if there may be some penalties you may face, and how to appeal against them.
● How many years of contributions are needed for a full state pension?
In order to get the full state pension when you retire, you need to pay contributions or credits for 35 years. It is not needed these years should be consecutive but you can make voluntary payments that can count towards your entitlement. If your contributions are less than 35 years, you’ll get a pension based upon the amount you’ve paid in and if it’s less than 10 years, you may not qualify.
● Who qualifies for national insurance credits?
One can qualify for national insurance credits based on certain circumstances. For instance, if you are receiving benefits such as jobseekers’ allowance or receiving maternity or paternity pay.
● Do I need a national insurance card?
Uk citizens were issued national insurance cards previously, but the practice has been phased out by the end of 2011. Now, HMRC sends a letter to new applicants and people reaching the age of 16 listing their national insurance numbers. So, one is not required to produce a national insurance card for applying for a job, the letter from HMRC would be enough evidence of your NI number.
● Can I work without an NI number?
You need to apply for an NI number as you plan to work in the country. However, you can start working before you receive your NI number by proving your right to work in the country for example, by showing your visa. Once you receive your NI number, make sure your employer updates their records.
● What happens if I give the wrong NI number?
If you accidentally provide the wrong NI number, HMRC may not be able to match your contributions to your record. Generally, HMRC staff ensures erroneous NI numbers with the right person based on other information provided. But if you get to doubt your number is wrong, at first, check your national insurance record to see if there are gaps where contributions or credits have not been counted.
In that case, talk to your employer and ask for your records to be corrected. Otherwise, contact HMRC on 0300 200 3500 about the error. You may be asked to provide proof of your employment, like payslips or P60s.
Like income tax, national insurance is a tax on earnings and self-employed profits. The national insurance contributions are paid into a government fund which is used to provide various state benefits to qualified citizens of the country such as state pension, statutory sick pay, maternity leave, or entitlement to additional unemployment benefits.
National insurance is paid by employers, employees, and as well as self-employed individuals till they reach the age of pension. It effectively reduces the tax bill for the contributors. Every worker is subject to pay national insurance contributions as they reach the government-issued threshold of earnings. You can visit the gov.uk website to read the rules and guidelines about the subject.