National Insurance contributions are a mandatory tax for workers and employers in the UK. The payments made through National Insurance go towards the state pension and other benefits that are there to help individuals when they require help. These other benefits may include:
But what exactly is National Insurance and how does it apply to workers and employers in small and medium sized businesses? In this article we will look to answer these questions and many more.
Let’s get started.
What exactly is National Insurance?
National Insurance is a tax that both employees and their employers have to pay, with both making contributions based on how much the employee earns. For the employee, National Insurance is paid directly from their earnings, deducted by the employer from their gross pay and given to HMRC. For the employer, their contributions are paid on top of the employee’s earnings and benefits (again to HMRC) and is a cost the employer must bear in addition to the employee’s gross pay.
The money from National Insurance contributions is used by the government to maintain the state pension scheme as well as to fund various benefits available to those who need them. As such, it is a form of Social Security payment and different to taxation.
How much is National Insurance for employees?
If you are an employee, you will have to pay Class 1 contributions. You only start paying when you earn over £242.00 a week (2022 to 2023 tax year). These payments will be taken automatically from your wages through PAYE by your employer who will then forward the money to HMRC.
How much are National Insurance contributions for employers?
Employers pay Class 1 National Insurance contributions of 15.05% on all earnings above the secondary threshold for almost all employees. For 2022/2023 this threshold is £175.01 per week or £758.00 per month.
What if I am self-employed?
If you’re self-employed you will need to pay Class 2 and Class 4 National Insurance Contributions.
Class 2 contributions
The Class 2 payment thresholds for NI contributions in 2022-23 are a little more complicated than the previous years. Between 6th April and 5th July, those earning between £6,725 and £9,880 don’t pay Class 2 contributions. From 6th July to the end of the tax year, those earning between £6,725 and £12,570 won’t pay Class 2 contributions.
If your earnings exceed £9,880 between 6 April and 5 July, or £12,570 from 6 July onwards, you’ll pay Class 2 contributions of £3.15 a week.
Class 4 contributions
In 2022 to 2023 you will pay Class 4 National Insurance contributions at 10.25% on annual profits between £12,570-£50,270. However, between 5 April and 6 July 2022 the thresholds were set at £9,880-£12,570. You pay 3.25% on profits over £50,270.
These thresholds are based on profit and not turnover. The payments are made when you fill in your self-assessment at the end of the tax year
What are National Insurance Credits?
National Insurance Credits can be claimed if you are unable to pay National Insurance contributions due to illness or you’re currently caring for someone. These credits ensure there are no gaps in your National Insurance record. Gaps in a National Insurance record can prevent an individual from claiming full state pension or other benefits they should be entitled to.
What are Class 3 National Insurance contributions?
Class 3 National Insurance contributions are voluntarily paid by people who want to avoid, or fill, gaps in their National Insurance record in order to make sure they receive the full State Pension amount and are entitled to all State Benefits.
The cost of Class 3 National Insurance contributions is £15.85 a week in 2022-23.
Why would I have a gap in my National Insurance record?
There are several reasons why people have missing NICs from their record:
- They have worked or lived abroad
- They have been unemployed and not claimed any State benefits
- They have been in low paying employment
- They are self-employed with profits too small to pay Class 2 NICs
Why would I pay extra National Insurance voluntarily?
There are different reasons why people choose to pay Class 3 NICs:
- You will not make the 35 ‘qualifying years’ you need to receive the full State Pension.
- Your self-employed profits are too low to pay Class 2 NICs but you want to be eligible for State benefits.
- You want to increase your State Pension weekly amount.
- You would like your civil partner or spouse to get more Bereavement Benefit when you die.
How do I check gaps in my National Insurance records?
To check your National Insurance contribution record you will need a Government Gateway account. It’s easy to sign up and can be done online. Once your account is activated you can view your entire contribution record. You will be able to see any gaps and make voluntary payments to fill them if you wish.
How many years do I have to pay National Insurance to achieve a full state pension?
To get the full benefit of state pension you must have at least 35 full years of National insurance contribution payments. You can benefit from a proportion state pension if you have between 10 and 35 years. All years must be qualifying, and full payments made.
National Insurance can be a difficult topic to understand but is vital if you are an employee or employer in the UK.
We hope you have enjoyed this guide. For more useful workplace information, check out the rest of our website.