What are National Insurance (NI) Contributions?
National Insurance is often seen as another type of tax – it can certainly feel like it. It accounts for around 21% of the government’s revenue. ‘Contributions’ (your payments/deductions) go towards ensuring you qualify for certain benefits, such as Jobseekers Allowance, Maternity Allowance etc – you can see a list here. They also count as earnings for working out your state pension entitlement.
Trivia: The system was originally introduced in 1911 and expanded on in 1948. Its originally intention was to be a form of insurance (hence the name!) against illness and unemployment.
When do I start paying it?
The ‘thresholds’ at which you start to pay NI move most tax years. At the time or writing you can earn £8,632 per year (£166 per week) without paying NI. Once you pass this threshold you pay at following rates:
Self-employed (‘Class 4’): 9% (with around ~£150 a year in ‘Class 2’)
Employed (‘Class 1’): 12%
If you reach the higher tax threshold (currently £50,000 a year) you will pay 2% of those earnings above this amount.
Class 2 (if you’re self employed) has its own threshold of £6,365. You can choose to pay this voluntarily as it affects entitlement to certain benefits.
There are other classes, but these are the main ones worth knowing about.
Employee NI Tax Trap: You can end up paying NI on your earnings, even if you don’t reach the £8632 a year. NI is calculated on individual ‘pay periods’, so if you are paid weekly, if you exceed the £166 in that week you will pay NI, even if over the year you would earn under the limit.
How and when do I pay it?
Self-employed: You pay it all in your tax return each year, so normally any contributions due are payable 31st of January following the end of the tax year. You pay this with your tax bill to HM Revenue & Customs each year.
Employed: Deducted from your pay automatically each time you are paid. Check your payslip to see this in action. Your employer pays this over to HM Revenue & Customs each month.
A note for the self employed
When you register for self-employment (https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed) this will also register your for the correct type of National Insurance. This is an important step to carry out, otherwise it can cause a query over the amount of ‘Class 2’ NI that is due.
What if I’ve overpaid?
In general it is unlikely that will have overpaid, so as standard HMRC do not pro-actively reconcile taxpayers accounts. It can happen though, so if you believe you have overpaid you can complete their tool online to claim a refund: https://www.gov.uk/claim-national-insurance-refund
I’m a director and receive mainly dividends – do I pay NI?
There is no NI chargeable on dividends, which make them an attractive method of paying yourself. Normally an accountant will advise some salary still, in order to maintain your state pension record. It is possible to pay no NI at all and still maintain a pension record by doing this, if your salary is set at the right level (between two thresholds).
I’m an employer – what NI do I pay?
You will deduct and handover NI on behalf of your employees. If they pay NI, you will usually be paying it also. You will pay it on amounts over the same threshold, at 13.8% (‘Secondary’ Class 1). There is currently an allowance applicable to most small employers of £3000 a year. Offset against your first £3000 employers’ NI. A massive helping hand when growing a business.
If you pay for any employment benefits, such as medical insurance, you will pay 13.8% on these benefits as well (Class 1A). This is normally paid once a year when you issue your ‘P11D’s (read more on this here ).
If you have any further questions on the above, please get in touch with the team and we would love to answer them for you!