People generally dislike parting with their hard-earned money for taxes, even though these funds support essential services like infrastructure, the NHS, and education.
National Insurance stands out in this realm. Whether it’s the term ‘contribution’ or the more personal connection we feel, it doesn’t evoke the same negativity as other taxes. It could be because contributing to National Insurance is akin to saving for your future self and securing your state pension.
Nevertheless, it’s crucial, as almost everyone employed in the United Kingdom must pay it. Failing to contribute can limit your access to certain benefits and your state pension, so being part of it is key to reaping the rewards in the future.
What is National Insurance?
National Insurance serves as a form of social security tax in the United Kingdom, obligatory for most workers and employers.
Essentially, it functions as a safety net, transforming into a state pension and benefits when needed.
If you’re 16 or older, National Insurance is mandatory under the following conditions:
- You’re an employee earning above £242 a week. Or
- You’re self-employed and generate over £12,570 a year in profit.
The calculation of your contribution is similar to income tax, based on gross earnings (prior to tax or pension deductions) or profits (earnings minus allowable expenses) above a specific threshold.
Don’t worry, we’ll delve into the details shortly.! And just so we’re clear, “NI” stands for National Insurance, and “NICs” stands for National Insurance Contributions. It’s that straightforward!
What does National Insurance pay for?
The funds collected through National Insurance serve a crucial role in supporting state benefits, including the State Pension, Jobseeker’s Allowance, maternity and paternity allowance, among others.
Additionally, these funds contribute to bolstering funding for the NHS. In essence, National Insurance not only plays a significant role in benefitting the country by funding essential services but also stands ready to provide support to individuals in times of need.
Who’s exempt from National Insurance?
If you’re an employee earning between £123 and £242 a week or self-employed with annual profits ranging from £6,725 to £12,570, you fall into specific income brackets where you might not be making National Insurance contributions.
However, even during these non-paying years, your contributions are considered paid to safeguard your National Insurance record. This provision is not only considerate but also crucial because maintaining a complete record is essential for qualifying for a full state pension and accessing the benefits you may require.
What are the consequences if there are breaks or gaps in your National Insurance record?
There might be occasions when gaps appear in your National Insurance record, and that’s a situation you’d likely want to avoid.
Various factors could contribute to this, such as:
- Residing or working outside the UK
- Being self-employed with insufficient profits
- Holding employment with low earnings
- Experiencing unemployment without claiming benefits
If feasible and eligible, consider topping up your record by making voluntary contributions to fill these gaps. It’s essential to do so to safeguard your access to benefits and pension.
Keep in mind that there’s a six-year limit for retroactively addressing these gaps.
How long is it necessary to make National Insurance payments?
Fortunately, there is a conclusion to National Insurance Contributions (NICs). Once you reach the state pension age, it’s time to cease contributing to your NI fund and begin receiving its benefits.
Simply provide your employer with proof of your age, and your contributions will cease.
However, the option to continue paying remains available if you wish to do so.
What are the difference National Insurance classes?
National Insurance is categorised into several classes based on an individual’s employment and income status.
Here’s a breakdown:
- i. Class 1: Paid by employees earning over £242 a week and under State Pension age. Employers also contribute Class 1 on earnings exceeding £175 per week.
- Class 1A or 1B: These classes pertain to payments on employees’ expenses or benefits.
- Class 2: From 6 April 2024, self-employed people with profits above £12,570 will no longer be required to pay Class 2 NICs. While not abolished entirely, the contributions are no longer mandatory, and all eligible workers can continue to make voluntary contributions.
- Class 3: Individuals can pay Class 3 to fill gaps in their National Insurance record. It’s a voluntary top-up to ensure a complete NI record
- Class 4: Self-employed individuals with profits of £12,570 or more a year pay Class 4 contributions. The rate is 9% on profits between £12,570 and £50,270, and 2% on profits exceeding £50,270.
What are category letters?
Each employee is designated an NI category letter based on their specific circumstances, and this letter may undergo changes over time.
Each letter means something different. Let’s crack that code:
| Category letter | Employee group |
| A | This category encompasses almost everyone. |
| B | This category is for married women and widows who are entitled to pay reduced National Insurance. |
| C | This category includes employees who have surpassed the State Pension age. |
| H | Apprentices under the age of 25 will have different criteria for National Insurance Contributions (NICs). |
| J | Employees who can defer NI because they’re already paying it in another job. |
| M | Employees below the age of 21 are subject to different rules. |
| V | Employees who are in their initial job after leaving the armed forces (veterans) will have varying payment rates. |
| Z | Employees under 21 who can defer NI because they’re already paying it in another job – basically J+M! |
There is a set of category letters specifically for employees working in freeports (commonly referred to as tax havens, such as the Isle of Man).
| Category letter | Employee group |
| F | Every employee working in freeports, excluding those falling into codes I, L, and S. |
| I | Married women and widows employed in freeports, entitled to pay reduced National Insurance, receive their unique NI letter category. |
| L | Employees who work in freeports and can defer NI because they’re already paying it in another job are another one to watch out for. |
| S | Employees working in freeports who have surpassed the State Pension age. |
There’s also the category letter X, and it’s as straightforward as it sounds. This category is for employees exempted from paying National Insurance, such as those under 16.
As for foreign-going mariners and deep-sea fishermen (or women), they follow an entirely distinct National Insurance plan, and delving into the details could take quite a while…
Categories and NI contributions
The helpful folks at GOV UK have crafted a cheat sheet to ensure you’re ready for the inevitable. You can cross-reference your category letter with your monthly income to determine the percentage of your pay that should be allocated to National Insurance contributions for the tax year from 6 April 2024 to 5 April 2025.
Here are the updates rates which will take effect from 6th January 2024:
| Category letter | £123 to £242 (£533 to £1,048 a month) | £242.01 to £967 (£1,048.01 to £4,189 a month) | Over £967 a week (£4,189 a month) |
| A | 0% | 8% | 2% |
| B | 0% | 1.85% | 2% |
| C | N/A | N/A | N/A |
| F | 0% | 10% | 2% |
| H | 0% | 8% | 2% |
| I | 0% | 1.85% | 2% |
| J | 0% | 2% | 2% |
| L | 0% | 2% | 2% |
| M | 0% | 8% | 2% |
| S | N/A | N/A | N/A |
| V | 0% | 8% | 2% |
| Z | 0% | 2% | 2% |
For individuals falling into category A, earning £1,000 in a week would result in the following National Insurance payment breakdown:
- No contribution on the first £242.
- 8% on earnings between £242.01 and £967.
- 2% on the remaining earnings above £967.
What about employer contributions?
What’s particularly reassuring about National Insurance contributions is that you’re not in it alone. Your employer is also contributing towards your future financial security.
Once more, the good folks at GOV UK can guide us through how this operates for the tax year from 6 April 2023 to 5 April 2024.
| Category letter | £123 to £175 (£533 to £758 a month) | £175.01 to £481 (£758.01 to £2,083 a month) | £481.01 to £967 (£2,083.01 to £4,189 a month) | Over £967 a week (£4,189 a month) |
| A | 0% | 13.8% | 13.8% | 13.8% |
| B | 0% | 13.8% | 13.8% | 13.8% |
| C | 0% | 13.8% | 13.8% | 13.8% |
| F | 0% | 0% | 13.8% | 13.8% |
| H | 0% | 0% | 0% | 13.8% |
| I | 0% | 0% | 13.8% | 13.8% |
| J | 0% | 13.8% | 13.8% | 13.8% |
| L | 0% | 0% | 13.8% | 13.8% |
| M | 0% | 0% | 0% | 13.8% |
| S | 0% | 0% | 13.8% | 13.8% |
| V | 0% | 0% | 0% | 13.8% |
| Z | 0% | 0% | 0% | 13.8% |
What is NI deducted from?
Employers deduct contributions from your wages before payment (similar to income tax) and also make their own contributions for each employee. There are no major changes for 2023-24, so no increases, but also no compensation for the rising cost of living—it’s the usual give and take in life!
National Insurance contributions apply to almost every aspect of your wage, including your salary, commission, bonuses, and any overtime. Even during periods of statutory sick pay (SSP) or maternity/paternity leave, you continue making contributions—an essential practice to avoid gaps in your record.
While work-related expenses can be deducted, regulations are stringent, particularly for employees compared to the self-employed, so it’s crucial to ensure accuracy.
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