National insurance how does it work

Self-employed NICs lines include Class 2 contributions in the average rate, but exclude them in the marginal rate. However, the link between contributions and benefits has weakened over time, to the point where there is now barely any connection at all between the amount of NICs paid and the amount of benefits received. Throughout the many reforms to both contributions and benefits that have taken place over the years, minimal attention has been paid to closeness of the link between the two.

By far the biggest contributory benefit is the state pension. But it is now quite hard to live in the UK and not earn entitlement to a full state pension. The contributory system does serve to withhold certain benefit entitlements from some small groups. But its main practical function nowadays is to ensure that foreigners cannot retire to the UK and claim a full state pension. There may be a case for a genuine social insurance system, but it is not what we currently have.

There are still a number of contributory benefits:. Some other historical benefits are still being paid for which entitlement depends on past contributions, but new contributions no longer generate new entitlements to them. We do not describe these benefits here, or the complicated rules that relate contributions to entitlements. The important fact is that in practice there is very little link between the amount of contributions someone pays and the benefits they receive, for several reasons:.

The self-employed accrue entitlement to contributory benefits via their Class 2 not Class 4 contributions. But the value of these reduced entitlements is small: nowhere near enough to justify the much lower NICs levied on self-employment income than on employment income. Self-employed people who earn less than the small profits threshold, and therefore do not have to pay Class 2 NICs, can choose to pay them voluntarily in order to build up benefit entitlements.

They can be paid in a variety of circumstances, but in practice very few people do so, typically UK citizens living but not working abroad in order to maintain their entitlement to benefits when they return.

NICs are often thought of as being ring-fenced to pay for the contributory benefits described above, or to pay for the National Health Service. The reality is different. That is topped up from general taxation to whatever the government wishes to spend on the NHS in total: how much of that total notionally comes from NICs revenue is irrelevant. Notionally, the NI Fund is financially separate from other parts of government and is used to fund contributory benefits.

In reality, however, this separation is illusory. In years when the fund is not sufficient to finance benefits, it is topped up from general taxation revenues; and in years when the fund builds up a surplus, it is used to reduce the national debt: essentially, the government lending money to itself.

This makes the separation of the NI Fund from the main government account more or less meaningless. The UK has two taxes on income — income tax and National Insurance contributions.

Read more along with income tax by employers and the self-employed. Read more schedule for someone whose income is stable and comes entirely from earnings. The charts assume all income is from earnings. Employment lines assume earnings are stable throughout the year and ignore the employment allowance. Read more rises or falls. But it also reflects a lack of alignment between income tax and NICs.

At present, the upper earnings limit and the upper profits limit UPL are aligned with the higher-rate threshold except in Scotland. The schedule in Scotland looks even more complicated than that in the rest of the UK. Aligning thresholds within the current system matters less than it might seem for simplification, however. Since income tax and NICs are assessed 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, anywhere in the UK.

Given the similarity of the two taxes, it would be simpler — both more transparent and less administratively burdensome — if they were merged into a single tax. Most of the remaining differences between the two taxes could be retained if that were considered desirable for example, a combined tax could be charged at a lower rate on items that are currently subject to one tax but not the other ; but integration would underline the illogicality of most of the current differences between the two taxes and provide an opportunity to remove them.

Calls for such integration have been widespread for many years, but successive governments have rejected them. Overview You pay National Insurance contributions to qualify for certain benefits and the State Pension. This page is also available in Welsh Cymraeg. Print entire guide. Brexit Check what you need to do. Is this page useful? Maybe Yes this page is useful No this page is not useful. You can see rates for past tax years.

From 6 April to 5 April National Insurance contributions will increase by 1. You pay Class 1 National Insurance contributions. The rates for most people for the to tax year are:. You pay National Insurance with your tax. Your employer will take it from your wages before you get paid. Your payslip will show your contributions. You pay Class 2 and Class 4 National Insurance , depending on your profits. Most people pay both through Self Assessment. These state benefits are called contributory benefits.

In some cases, National Insurance credits will count towards these contributory benefits, but in other cases they will not. You should check carefully the eligibility requirements on GOV. Many benefits depend on sufficient NIC being paid or credited to create a qualifying year.

There are other benefits for which, provided the rules for claiming apply to you, it does not matter whether or not you have paid any or enough NIC.

Widowed parent's allowance only available where spouse or civil partner died before 6 April Note that there are exceptions to the above for share fishermen and volunteer development workers employed abroad.

You pay Class 1 NIC if you work for an employer, that is, you are an employee. Your employer takes the NIC off your wages before paying you. Your employer also has to pay NIC on your earnings, but you need not worry about these.

There is detailed information about Class 1 NIC in the employment section, including examples. You pay Class 2 NIC if you are self-employed. There is more information in our self-employment section. This means that you do not have to pay contributions during the tax year. Your liability will arise at the end of the tax year and you can pay it with your Self Assessment tax bill. This should happen automatically if you complete form CWF1 when you commence self-employment.

In this case, you should contact HMRC on and ask for this to be corrected. Class 2 NIC can also be paid by those who are employed or self-employed overseas in certain circumstances. For more information, please see our migrants section. If you are self-employed and your profits are less than a set limit — the Small Profits Threshold — you will not have any liability to Class 2 NIC. There is more information in the self-employment section.

These are also known as voluntary contributions. You can pay contributions for previous years in a lump sum. You pay Class 4 NIC if you are self-employed. Your employer deducts Class 1 NIC from your gross wages before deductions, together with any income tax due, and pays you the net amount after deductions. Alternatively, you can make payments regularly throughout the tax year using a Budget Payment Plan. There is more information on the methods of payment on GOV.

To find out more see How do I pay tax on self-employed income? There is a limit to the amount of NIC you need to pay in a tax year across different classes of contribution. If you have had only one employment you should not have overpaid NIC. This is because it is relatively uncommon for an individual to have paid the wrong amount of NIC.

You cannot claim a refund of NIC simply because you stop work or do not work for the whole tax year. For more information visit the migrants section. It is possible for you to check your NIC record by:. Roger has a job with the local bank. Each week he pays Class 1 NIC of:. If you are an employee, you can find more information on NIC in the employment section.

This includes information on what happens in the following situations:. If you are self-employed, you can find more information on NIC in the self-employment section.

This includes information on what happens if you are both employed and self-employed.