National Insurance Contributions - the basics

You have probably come across national insurance contributions (NIC) which are payable to the tax authorities in the UK. The government does not call it tax but in fact this is an additional tax which you are required to pay in addition to income tax.

National Insurance (NI) in the United Kingdom is a system of contributions paid by employees, employers end the self-employed towards the cost of certain state benefits. It was initially a contributory system of insurance against illness and unemployment, and later also provided retirement pensions and other benefits. It was first introduced by the National Insurance Act 1911, expanded by the Labour government in 1948 and has been subject to numerous amendments in subsequent years.

What does National Insurance Contributions mean?

National Insurance Contributions (NIC) is a special contribution some individuals pay out of their earnings. Unlike other tax charges NIC is paid to build up an individuals' entitlement to certain state benefits - State Pension and other social security benefits.  

The National Insurance number (NIN) is a personal account number which allocates the individual's NIC account. NIN cannot be changed and remains the same throughout your life time.  

Apart from the employee, the employer also is liable to NIC and NICs are calculated and deducted through the PAYE (Pay As You Earn) system when you operate your payroll and must be recorded on the Full Payment Submission (FPS) and paid to HM Revenue & Customs (HMRC)

State benefits that depend on National Insurance contributions

State benefits that are linked to NIC are known as 'contributory benefits'.

Individual's entitlement to 'contributory benefits' and the amount a person can get depends on their NIC record.

NIC count towards the following state benefits:

1. Basic State Pension

2. Additional State Pension (sometimes called the State Second Pension)

3. New State Pension

4. Jobseeker's Allowance - the 'contribution-based' element

5. Employment and Support Allowance - the 'contribution-based' element

6. Maternity Allowance

7. Bereavement Support Payments

State benefits not linked to NIC:

Some state benefits are not linked to NIC. These are known as 'non-contributory benefits'. A person can be eligible for these benefits whether or not he has paid NIC or been credited with any contributions.

Some of these state benefits include:

1. Child Benefit

2. Guardian's Allowance

3. Universal Credit

4. Personal Independence Payment (PIP)

5. Working Tax Credit and Child Tax Credit

6. Attendance Allowance or Disability Living Allowance

7. Carer's Allowance

8. Industrial Injuries Benefits

9. Pension Credit

However, in most cases, only Contributory benefits and Industrial Injuries Benefits are available for those who have “no resource to public funds” remark on their visas.

Who pays NIC?

Everyone pays NIC if: 

1) a person as an employee or self-employed and

2) a person is aged 16 and over and

3) earnings are more than a certain level (a person can earn up to £242 a week (for the 2024/25 tax year)

If a person reaches State Pension age, he: 

1) stops paying National Insurance contributions if a person is employed

2) stops paying Class 2 contributions as soon as he reaches State Pension age) and Class 4 contributions (from the start of the tax year after the one in which he reaches State Pension age) if a person is self-employed

From 6 April 2024, no one will be required to pay Class 2 self-employed NICs. Class 2 NICs will still exist but primarily to allow self-employed individuals with profits below the Lower Profits Limit to make voluntary contributions. 

According to Autumn Statement 2023, further reforms of Class 2 NICs are expected this year, with the goal of abolition. This was reconfirmed in the Spring Budget with the promise of a future consultation, but no details have been published at the time of writing. 

The current state pension age for men and women is 66. The age threshold is scheduled to rise to 67 between 2026 and 2028 and is expected to increase to 68 from 2037.

The amount and type of NIC to be paid depends on: 

1) whether a person is employed or self-employed and

2) how much a person earns.

The amount and type of NIC to be paid (for 2024/25 tax year):

1) If a person is employed, he or she pays Class 1 NIC:

- if he earns more than £242 a week and up to £967 a week, he pays 8% of the amount he earns

- if he earns more than £967 a week, he pays 2% of all his earnings over £967

2) If a person is self-employed, he pays Class 2 and Class 4 NIC:

- Class 2 NIC are paid at a flat rate of £0 a week. If profits are expected to be less than £6,725 a person may choose to pay a voluntary £3.45 Class 2 NIC.

- Class 4 NIC are paid as a percentage of annual taxable profits - 6% on profits between £12,570 and £50,270, and a further 2% on profits over that amount. Class 2 and 4 National Insurance contributions are paid when a person pays his/her Income Tax, on 31 January and 31 July each year.

3) There are other rates that apply for the qualified married women and widows, share fishermen and volunteer development workers.

Voluntary NIC

Some people might also choose to pay voluntary NIC for the following reasons:

• They aren't working and are not claiming state benefits

• They are close to State Pension age and do not have enough qualifying years to get the full State Pension

• They know that they will not be able to get the qualifying years needed to get the full State Pension during their working life

• They live abroad and want to maintain their state benefits entitlement.

Voluntary contributions (usually Class 3 NIC) are paid at a flat rate of £17.45 a week. They are paid either monthly by Direct Debit or by quarterly bill. But if there are gaps in individual's NIC one-off payments of voluntary contributions might be made to fill these. 

NIC classes and what they pay for:

*Except for share fishermen and volunteer development workers employed abroad

Class 4 NIC - paid by some self-employed people - don't count towards any state benefits. Class 1A and Class 1B contributions - paid by employers only - don't count towards any state benefits. 

National Insurance credits

National Insurance credits are available in certain circumstances to give a person 'credit' to cover contributions he or she couldn't make because they weren't able to work.

Credits can protect individual's entitlement to certain benefits:

- Class 1 credits count towards entitlement to the basic State Pension, bereavement benefits and some other state benefits

- Class 3 credits - which count towards entitlement to the basic State Pension and bereavement benefits only

An individual won't normally need National Insurance credits when he or she is due to pay Class 1 (as an employee) or 2 (as a self-employed person) contributions.

Checking NIC record 

If individuals need to check their National Insurance record, they can check records online or ask HMRC for a statement of their National Insurance account. They can also request a pension forecast to establish how much state pension they will receive on retirement.

Services we offer

We are pleased to be able to offer the following taxation based services:

• A General tax consultation and/or specific tax advice;

• Tax planning for your general situation or for a specific transaction;

• Registration for National Insurance and Unique Tax Reference numbers;

• Preparation and submission of annual self-assessment returns;

• Preparation and submission of return for overseas landlords;

• Formation of UK and offshore companies in respect to an acquisition of the commercial property and administrative and accounting services for corporate entities.

All taxation services are arranged on a fixed fee basis with the fee to be charged agreed in advance of any work being undertaken.

For all questions regarding your business in the UK and tax planning, please contact our Business Consultancy team at Law Firm Limited on +44 (0)20 7907 1460 or via email.