Jane Dotson
National Insurance contributions (NICs) are the UK's second-largest tax, raising around £170 billion in 2024-25. NICs are paid by employees and the self-employed on their earnings, and by employers on the earnings of those they employ. The amount of NICs paid depends on income, with earnings below a certain threshold free of NICs. NICs are calculated on gross earnings or profits above a threshold, and rates vary depending on income level. While NICs are typically mandatory, individuals can choose to pay voluntary NICs at a flat weekly rate to maintain or build entitlement to certain benefits.
| Characteristics | Values |
|---|---|
| Who pays National Insurance | Employed or self-employed workers |
| Age range | 16 until state pension age (currently 66) |
| Type of income charged | Earned income, not investment income |
| Calculation | Gross earnings or profits above a threshold |
| Voluntary NICs | Flat weekly rate, to build up entitlement to benefits |
| NICs paid to | HMRC, which keeps a record of NICs paid |
| Benefits | State pension, sick pay, maternity leave, unemployment benefits |
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What You'll Learn
- National Insurance is calculated on gross earnings or profits above a threshold
- NICs are paid by employees, the self-employed, and employers
- NICs are paid to HMRC and are the UK's second-biggest tax
- NICs are paid into a fund from which state benefits are paid
- NICs are calculated differently for the self-employed
National Insurance is calculated on gross earnings or profits above a threshold
National Insurance is a tax on earnings and self-employed profits. National Insurance contributions (NICs) are paid by employed or self-employed workers. The amount of NICs one pays depends on how much they earn. NICs are payable on income from working, not on investment income such as bank interest or dividends, pension income, or rental income. NICs are calculated on gross earnings (before tax or pension deductions) or profits (earnings minus allowable expenses) above a threshold. The rates vary from year to year but are based on a percentage of income above certain levels. For instance, in the 2021/22 tax year, the threshold was £12,570 per year, the same as the income tax personal allowance.
The way in which one works will affect the type (class) of NICs they pay. For example, employees pay class 1 NICs if they earn above a certain amount, while self-employed individuals usually pay class 2 and class 4 NICs. Class 3 NICs are voluntary and can be paid to protect future entitlement to the state pension. They are paid at a flat weekly rate, which was £15.30 per week in 2021.
If one is employed, their employer deducts the NICs from their monthly pay along with income tax. On the other hand, if one is self-employed, they need to organise these contributions themselves, usually through their self-assessment tax return.
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NICs are paid by employees, the self-employed, and employers
National Insurance Contributions (NICs) are paid by employees, the self-employed, and employers. NICs are calculated based on gross earnings or profits above a certain threshold. Employees who are paid a salary have their NICs automatically deducted from their monthly pay through the PAYE (Pay As You Earn) system, which also includes income tax deductions. Self-employed individuals, on the other hand, must organise their NICs themselves, typically through self-assessment tax returns. They contribute partly through a fixed weekly or monthly payment and partly based on a percentage of their net profits.
The amount of NICs paid depends on factors such as age, retirement status, and earnings or profits. NICs are paid into a fund that covers various state benefits, including the state pension, statutory sick pay, maternity leave, and additional unemployment benefits. It is important to note that NICs are not charged on income from sources such as savings, pensions, or property.
While NICs are often associated with funding the National Health Service (NHS), only a portion of the revenue is directly allocated to the NHS. The remaining funds are paid into the National Insurance Fund, which is used for benefits. In recent years, the link between NICs and benefits has weakened, and there is now little connection between the amount paid in NICs and the amount of benefits received.
Some individuals may choose to pay voluntary NICs to secure entitlements to certain benefits, particularly if they are living or working abroad. These voluntary contributions can help protect their entitlement to benefits when they return to the UK or ensure they receive a full state pension.
Employers also pay NICs on the earnings of their employees and on certain benefits-in-kind provided to their employees, such as company cars. These contributions are an essential component of the welfare state in the United Kingdom, providing social security and establishing entitlement to state benefits for workers and their families.
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NICs are paid to HMRC and are the UK's second-biggest tax
National Insurance Contributions (NICs) are a tax on earnings and self-employed profits. NICs are paid to HMRC, the UK government body responsible for the collection and administration of most taxes, and are the UK's second-biggest tax. NICs are paid by employed or self-employed workers, and employers also pay NICs on the earnings of those they employ.
NICs are calculated based on gross earnings (before tax or pension deductions) or profits (earnings minus allowable expenses) above a certain threshold. The amount of NICs to be paid is calculated by the employer and transferred directly to HMRC. For the self-employed, NICs are paid via the self-assessment system, with the amount of tax to be paid calculated by the individual and declared on a tax return sent to HMRC.
NICs are often thought to be ring-fenced to pay for the NHS or contributory benefits such as the state pension, statutory sick pay, or maternity leave. While some NICs revenue does go towards these purposes, the reality is that only about a fifth of NICs revenue is allocated directly to the NHS, and the link between NICs paid and benefits received has weakened over time.
NICs are expected to raise just under £170 billion in 2024-25, or around a sixth of all tax revenue. The main reason NICs are the second-biggest source of revenue is that personal income makes up the majority of total national income. NICs are only levied on the labour income element of personal income, which includes the wages and salaries of employees and the earnings of the self-employed.
While NICs are typically mandatory for employed and self-employed workers, some individuals can choose to pay voluntary NICs at a flat weekly rate to build up entitlements to certain contributory benefits. However, in practice, very few people pay voluntary NICs.
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NICs are paid into a fund from which state benefits are paid
National Insurance contributions (NICs) are paid by employed or self-employed workers. NICs are calculated based on gross earnings (before tax or pension deductions) or profits (earnings minus allowable expenses) above a threshold. The amount of NICs paid depends on the worker's employment status, age, and retirement status. NICs are paid into a fund from which some state benefits are paid. This includes the state pension, statutory sick pay, maternity leave, and additional unemployment benefits.
NICs are the UK's second-largest tax, with expected revenue of just under £170 billion in 2024-25, accounting for about one-sixth of all tax revenue. They are paid by employees, the self-employed, and employers who contribute based on the earnings of those they employ. While NICs are calculated based on earnings, they are not charged on income from other sources such as savings, pensions, or property. The self-employed have their own system for paying and determining contribution levels, which may differ from the benefit entitlements of employed workers.
Individuals can choose to pay voluntary NICs at a flat weekly rate to maintain their entitlement to certain benefits. This option is typically exercised by UK citizens living abroad who wish to maintain their benefit entitlements upon returning to the UK or by self-employed individuals with small profits. Voluntary contributions are made to protect future entitlement to the state pension, particularly when self-employed profits are insufficient to qualify for automatic credits.
While NICs are often thought to be directly linked to funding specific benefits or the National Health Service (NHS), the reality is more complex. A portion of NICs revenue is allocated directly to the NHS, but this is supplemented by general taxation. The remaining NICs revenue is paid into the National Insurance Fund, which is separate from other tax revenues. The proceeds from this fund are then used to pay for social security benefits and the state pension.
The link between NICs paid and the amount of benefits received has weakened over time, with minimal attention given to maintaining a close connection between the two during reforms. As a result, there is now barely any direct correlation between the amount of NICs paid and the benefits received.
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NICs are calculated differently for the self-employed
National Insurance contributions (NICs) are the UK's second-biggest tax, and they are paid by employees and the self-employed on their earnings. NICs are calculated differently for the self-employed, with two different classes of NIC that may be relevant: class 2 and class 4. From 6 April 2024, self-employed taxpayers will no longer need to pay class 2 NIC. However, in certain circumstances, one might wish to pay class 2 NIC voluntarily. Class 4 NIC is calculated based on the level of taxable self-employed profits. One is only liable to pay class 4 NIC if their taxable profits are over the lower profits limit.
Class 2 and class 4 NICs are calculated and paid along with income tax due through the self-assessment system. If one makes payments on account, then their class 4 NIC will be included when calculating the instalments. If one does not pay their tax through payments on account, then class 4 NIC will usually be due on 31 January following the end of the tax year to which it relates. Class 2 NIC is usually paid as part of the payment due on 31 January following the end of the tax year, regardless of whether or not one makes payments on account.
Class 4 NIC is paid in profit bands. For example, if someone has profits of £13,000 for the tax year 2025/26, they will be treated as having paid class 2 NIC for the purpose of their NIC record but will not actually pay any class 2 NIC. If someone has profits of £55,000 for the tax year 2025/26, their class 4 NIC liability will be calculated accordingly.
If someone is employed and self-employed, they will usually still need to pay class 4 NIC. However, if they pay a maximum amount of annual NIC by way of class 1, they may not need to pay the full amount of class 4 NIC. In this case, they will have to pay 2% class 4 NIC on all profits above the level of £12,570 (for 2024/25 and 2025/26). Their class 4 NIC liability will be automatically calculated, provided that they either file online or their paper tax return is submitted by the due date (normally 31 October following the end of the tax year), as part of the self-assessment process.
It is important to note that NICs are not levied on other income, such as income from savings, investments, rental income from property, private pensions, state pensions, and other social security benefits. Unlike income tax, private pension contributions made by a self-employed individual cannot be deducted from earnings for NICs purposes. This is because NICs are not levied on the future pension income generated.
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Frequently asked questions
National Insurance contributions (NICs) are the UK’s second-biggest tax, paid by employees and the self-employed on their earnings, and by employers on the earnings of those they employ. NICs are paid to qualify for certain benefits, such as the state pension.
No, National Insurance is not a flat rate. NICs are calculated based on gross earnings or profits above a certain threshold. The amount of NICs paid depends on how much one earns, and they are expressed as a percentage of that labour cost or profit. However, Class 3 NICs are paid at a flat rate, which was £15.30 per week as of 2021.
If you are employed, your employer will deduct the NI contributions from your pay along with the income tax. If you are self-employed, you will pay via your self-assessment tax return annually.
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