Orlando Harmon
National Insurance is a system in the UK where contributions are collected by HM Revenue and Customs (HMRC) from employees and employers. These contributions are used to fund certain types of welfare expenditure and are not used to fund general government spending. National Insurance contributions are typically made through the PAYE (Pay As You Earn) system, alongside income tax. An individual's National Insurance contributions are recorded using their National Insurance number, which is unique to them and ensures that their contributions and tax are accurately recorded. The percentage of National Insurance paid is influenced by an individual's tax code, with different contribution rates for different employee categories. For example, employees under 21 pay a different rate than those who have reached the state retirement age.
| Characteristics | Values |
|---|---|
| How is National Insurance paid? | Paid with tax, deducted by the employer from wages |
| Who collects National Insurance contributions? | HM Revenue and Customs (HMRC) |
| How is National Insurance collected? | Through the PAYE (Pay As You Earn) system |
| What is the role of a National Insurance number? | It ensures that contributions and tax are recorded against an individual's name |
| Who is assigned a National Insurance number? | Every child in the UK shortly after birth when a claim to Child Benefit is made |
| What is the National Insurance number format? | Two letters, six digits, and one further letter or a space |
| What is the role of tax codes in National Insurance? | They dictate the % of National Insurance paid on contributions |
| How does the tax code "X" or "1" affect National Insurance? | Tax is calculated based on monthly taxable earnings instead of a cumulative basis |
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What You'll Learn
- National Insurance contributions are collected alongside Income Tax
- National Insurance contributions are mandatory for some
- Employers pay National Insurance on employee benefits
- National Insurance number is necessary for benefits
- National Insurance contributions are a significant source of UK government revenue
National Insurance contributions are collected alongside Income Tax
National Insurance contributions are collected by HM Revenue and Customs (HMRC) alongside Income Tax. The two are collected through the PAYE (Pay As You Earn) system, which also includes repayments of Student Loans and any Apprenticeship Levy that an employer is liable to pay. National Insurance contributions make up a significant portion of the UK government's revenue, raising £145 billion in 2019-20, which represented 17.5% of all tax revenue.
National Insurance is paid by employees earning over £242 per week from one job, or by those who are self-employed and making a profit of more than £12,570 a year. These contributions are made to qualify for certain benefits and the State Pension. To ensure that National Insurance contributions are correctly attributed to the individual, a National Insurance number is allocated to every child shortly after birth when a claim to Child Benefit is made. People coming from overseas must apply for a National Insurance number before they can qualify for benefits, and a tax code cannot be operated without one.
The amount of National Insurance paid is dictated by the individual's tax code. For instance, if an individual's tax code ends in the letter "X" or "1", tax will be assessed against their taxable earnings in that month. Otherwise, tax is assessed on a cumulative basis, taking into account the individual's earnings for the entire tax year. The tax code will also determine the percentage of National Insurance paid, with standard rates being 12% and then 2%.
It is important to note that National Insurance contributions are not directly linked to individual benefits. Instead, there is a threshold, and individuals will only start paying contributions when they earn over this threshold in a calendar month. This differs from income tax, where deductions are allowable, and the allowance can be split between employers.
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National Insurance contributions are mandatory for some
The requirement to pay National Insurance contributions depends on age and income level. If you are 16 or older and either an employee earning more than £242 per week from a single job or self-employed with annual profits exceeding £12,570, you must pay mandatory National Insurance contributions. Students are subject to the same contribution rules as other employees, with a threshold above which contributions become mandatory.
National Insurance contributions are calculated based on contribution letters, which dictate the percentage of contributions paid. For example, employees typically pay 12% and then 2%, while those under 21 pay the same percentages but on earnings above a certain threshold. Those who have reached the state retirement age do not owe any National Insurance contributions.
National Insurance contributions are necessary to qualify for certain benefits and the State Pension. An individual's National Insurance number ensures that their contributions and tax payments are accurately recorded. While a National Insurance number is not required to work in the UK, it is essential for operating a tax code and accessing benefits.
It is worth noting that National Insurance contributions are distinct from Income Tax in some key ways. For instance, National Insurance has an allowance per employer, whereas Income Tax allowances can be split between multiple employers via an individual's tax code. As a result, an individual with two low-paying jobs may pay less or even nothing in National Insurance compared to someone earning the same amount from a single job.
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Employers pay National Insurance on employee benefits
National Insurance contributions form a significant proportion of the UK Government's revenue, raising £145 billion in 2019-20, which represented 17.5% of all tax revenue. National Insurance is collected by HM Revenue and Customs (HMRC) through the PAYE (Pay As You Earn) system, alongside Income Tax.
Employers pay Class 1A and 1B National Insurance on expenses and benefits they provide to their employees. For instance, company cars, low-interest loans, and accommodation are some company benefits that are taxed. The rate from 6 April 2025 to 5 April 2026 on expenses and benefits is 15%. Employers must also pay Class 1A on certain lump-sum payments, such as redundancy payments.
The apprenticeship levy, introduced in 2017, is another example of a tax that functions similarly to employer NICs. This 0.5% levy is applied to employers with an annual wage bill exceeding £3 million. While it shares its name with apprenticeships, there is little connection between the two. Instead, the levy determines the percentage of apprenticeship training costs funded by the government.
It is important to note that the treatment of benefits in kind, or payments to employees in the form of goods or services rather than money, can vary. Some of these benefits are subject to NICs in full, while others may only be subject to employer NICs and not employee NICs.
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National Insurance number is necessary for benefits
National Insurance contributions are collected by HM Revenue and Customs (HMRC) through the PAYE (Pay As You Earn) system. These contributions form a significant proportion of the UK Government's revenue, raising £145 billion in 2019-20, which represents 17.5% of all tax revenue. The benefit component of the National Insurance system includes several contributory benefits, the availability and amount of which are determined by the claimant's contribution record and circumstances. These benefits include weekly income and some lump-sum benefits provided for participants upon death, retirement, unemployment, maternity and disability.
To obtain these benefits, a National Insurance number is necessary. Every child in the UK is allocated a National Insurance number shortly after their birth when a claim to Child Benefit is made. People from overseas must apply for an NI number before they can qualify for benefits, although it is not a prerequisite for working in the UK. The NI number is unique and consists of two letters, six digits, and one further letter or a space. For example, it could be QQ123456C.
The National Insurance number is also used as a de facto national identification number in the UK, including in the tax system, banking, social welfare, online government services, and electoral registration. It is important to keep this number secure to prevent identity fraud. The Department for Work and Pensions, local councils, Electoral Registration Officers, and pension providers may need to know an individual's NI number.
While it is not necessary to have an NI number to start an application for benefits, it is required to receive the benefits. If a National Insurance number is needed to get a benefit or student loan paid, the individual will be contacted and told how to obtain one.
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National Insurance contributions are a significant source of UK government revenue
National Insurance contributions are collected by HM Revenue and Customs (HMRC) through the PAYE (Pay As You Earn) system, alongside income tax, student loan repayments, and apprenticeship levies. The amount of National Insurance to be paid is calculated by the employer and transferred directly to HMRC, removing the need for individuals to deal directly with the tax authorities. Self-employed individuals pay National Insurance through the self-assessment (SA) system, with the amount of tax calculated by the individual and declared on a tax return sent to HMRC.
National Insurance contributions are not charged on all forms of personal income. Unlike income tax, they are only levied on labour income, including wages, salaries, and self-employed earnings. Additionally, earnings below a certain threshold are exempt from National Insurance contributions. Individuals who are employed may contribute through Class 1 National Insurance, while the self-employed may contribute through Class 2 and Class 4 National Insurance. Employers also pay National Insurance on expenses and benefits provided to their employees, known as Class 1A and 1B National Insurance.
National Insurance contributions are linked to certain benefits and the State Pension. To access these benefits, individuals must have a National Insurance number, which is allocated at birth or upon claiming child benefit. While National Insurance Funds cannot be used for general government spending, any surplus in the funds is invested in government securities, providing the government with low-interest loans.
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Frequently asked questions
National Insurance contributions are collected by HM Revenue and Customs (HMRC) alongside Income Tax. You pay National Insurance with your tax, and your employer will take it from your wages before you get paid.
Your tax code determines the % of National Insurance you pay on your contributions. For example, if your tax code is followed by the letter "X" or "1", this means that tax will be assessed against your taxable earnings in that month.
A National Insurance number is allocated to every child shortly after their birth when a claim to Child Benefit is made. People coming from overseas need to apply for an NI number before they can qualify for benefits.
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