Jane Dotson
National Insurance contributions (NICs) are paid by employees, employers, and the self-employed. NICs form a significant proportion of the UK government's revenue, raising £145 billion in 2019-20, or 17.5% of all tax revenue. These contributions are collected by HM Revenue and Customs (HMRC) and go towards funding benefits and the State Pension. To receive benefits and the State Pension, individuals need to have paid sufficient NICs to create a 'qualifying year'. NICs are credited to an individual's NI account, which determines eligibility for these benefits. Individuals can also make voluntary contributions to fill gaps in their NIC record and protect their entitlement to benefits.
| Characteristics | Values |
|---|---|
| Who collects the contributions | HM Revenue and Customs (HMRC) |
| How are the contributions collected | For employees, this is done through the PAYE (Pay As You Earn) system along with Income Tax, repayments of Student Loans and any Apprenticeship Levy which the employer is liable to pay. |
| What do the contributions form | They form a significant proportion of the UK Government's revenue, raising £145 billion in 2019-20 (representing 17.5% of all tax revenue) |
| What are the benefits | Weekly income and some lump-sum benefits are provided for participants upon death, retirement, unemployment, maternity and disability |
| Who gets the benefits | To obtain the benefits, a National Insurance number is necessary. This number is allocated to every child shortly after their birth when a claim to Child Benefit is made. |
| Who pays the contributions | Employees and employers on earnings, and by employers on certain benefits-in-kind provided to employees. Self-employed individuals also contribute. |
| How much is paid | The amount paid depends on how much one earns. There are different classes of NICs, and the amount paid depends on the class. |
| When to stop paying NICs | You usually stop paying NICs when you reach state pension age, even if you continue to work. |
| What if you don't pay NICs | If you don't pay NICs, you might get credits instead. You can also make voluntary contributions to plug gaps in your record. |
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What You'll Learn
National Insurance credits
There are two types of credits: Class 1 and Class 3. Class 1 credits count towards the State Pension and may help qualify for other benefits like New Style Jobseeker's Allowance. Class 3 credits only count towards the State Pension. Individuals can transfer credits obtained from registering for Child Benefit to their spouse or partner if they have paid a year's worth of National Insurance contributions.
To receive the full State Pension, individuals need at least 35 qualifying years of National Insurance contributions or credits. A reduced amount is provided for fewer than 35 years, and those with less than 10 qualifying years may receive nothing. Individuals can make voluntary contributions to fill gaps in their National Insurance records and ensure they receive their full State Pension.
Eligibility for National Insurance credits depends on circumstances. For example, individuals may qualify if they receive specific benefits, such as Jobseeker's Allowance or Carer's Allowance. It is important to check one's National Insurance record to identify any gaps and determine eligibility for credits.
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State Pension
National Insurance contributions are mandatory if you're 16 or older and earn above a certain amount. Paying these contributions earns you the right to receive certain benefits, such as the State Pension. You pay NICs from age 16 until you reach State Pension age. Your record comprises National Insurance Contributions paid or credited to you in each tax year. A minimum amount of contributions or credits is required for a year to count as a 'qualifying year' towards your overall contributions record.
You qualify for the State Pension based on the number of qualifying years you paid National Insurance contributions (NICs). To receive the full new State Pension, you need to have at least 35 qualifying years of National Insurance contributions or credits. You’ll get a reduced amount with fewer years, or nothing if you have less than ten qualifying years.
If you don't pay National Insurance contributions, you might get credits instead. This might be the case if you're ill or caring for someone. The government may give you credits so you can continue building up State Pension entitlement. You can also pay voluntary contributions to fill any gaps in your National Insurance contributions. You can buy back any missing years from the past six years.
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Employee and employer contribution rates
National Insurance contributions are mandatory for employees aged 16 or over earning more than £242 per week from a single job. The type of National Insurance you pay depends on your employment status and income. For instance, employed individuals stop paying Class 1 National Insurance once they reach the state pension age, while the self-employed stop paying Class 4 National Insurance from the start of the tax year after reaching the state pension age.
There are two types of National Insurance for the self-employed, depending on their profits. Voluntary contributions can be made to fill gaps in one's contribution record. The rate paid depends on whether there are four or five weeks in a given month.
Employers are responsible for deducting National Insurance contributions from their employees' pay. They also pay Class 1A and 1B National Insurance on expenses and benefits provided to employees, with a rate of 15% from 6 April 2025 to 5 April 2026. Additionally, they must pay Class 1A on specific lump-sum payments, such as redundancy packages.
National Insurance contribution rates for directors vary between 2022-2023 and 2023-2024. If paying voluntary contributions for these tax years, individuals will pay the original rates. For all other years, the current rate (2024-2025) applies. New National Insurance rates and thresholds will be introduced from 6 April 2025.
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Self-employed contributions
If you're self-employed, you're responsible for paying tax and National Insurance on your income. This means you'll need to complete a Self Assessment tax return, which is due by 31 January of the following tax year. You can register for Self Assessment on GOV.UK, and it's best to do so as soon as possible. If you register late, you might have to pay a penalty.
There are two different classes of National Insurance contributions (NIC) that may be relevant to you if you're self-employed: class 2 and class 4. From 6 April 2024, self-employed taxpayers no longer need to pay class 2 NIC. However, you may choose to pay class 2 NIC voluntarily to fill any gaps in your National Insurance record and maintain your entitlement to certain benefits. You can pay class 2 NIC online, by bank transfer, cheque, or payslips.
Class 4 NIC is calculated based on your profits from self-employment once they exceed a certain level. For the 2024/25 and 2025/26 tax years, you'll need to pay 2% class 4 NIC on all profits above £12,570. Your class 4 NIC liability will be automatically calculated as part of the self-assessment process if you file online or submit your paper tax return by the due date.
It's important to stay on top of your self-employed National Insurance payments to ensure you receive your full state pension when you're entitled to it. You'll need to have 35 qualifying years of NI contributions to receive the full pension and a minimum of 10 years to receive a reduced pension. If you're struggling to keep up with your finances, consider hiring an accountant to help you stay on track.
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Benefits
National Insurance contributions are mandatory if you are 16 or older and earn above a certain amount. These contributions are made to qualify for certain benefits and the State Pension. The type of National Insurance paid depends on employment status and income. For instance, if you are employed, you pay Class 1 National Insurance, and if you are self-employed, you pay Class 4 National Insurance.
Qualifying for the State Pension depends on the number of qualifying years of paid National Insurance contributions. A minimum amount of contributions or credits is required for a year to count as a 'qualifying year'. To receive the full State Pension, one needs at least 35 qualifying years of contributions or credits. A reduced amount is paid if there are fewer than 35 qualifying years, and nothing is paid if there are fewer than 10 qualifying years.
National Insurance credits may be given in certain situations where contributions are not paid, such as when one is ill or caring for someone. These credits are counted towards qualifying years for the State Pension.
Voluntary contributions can be made to fill gaps in National Insurance contributions. These are often made by those who are self-employed with low profits or those who know they will not be able to get the qualifying years needed for the full State Pension.
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Frequently asked questions
National Insurance contributions (NICs) form a significant proportion of the UK government's revenue. In 2019-2020, NICs raised £145 billion, representing 17.5% of all tax revenue.
National Insurance contributions are used to fund certain benefits and the State Pension.
If you are employed, your National Insurance contributions are automatically deducted from your salary through the PAYE (Pay As You Earn) system. If you are self-employed, you pay Class 4 NICs along with income tax on your self-employment profits through self-assessment.
There are several classes of National Insurance contributions, including Class 1, 2, 3, and 4 NICs. Class 1 contributions are paid by employees and employers, while Class 4 NICs are paid by the self-employed.
If you don't pay National Insurance contributions, you may still receive National Insurance credits, which can count towards qualifying years for the State Pension. You may also be able to make voluntary contributions to fill gaps in your record.
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