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Tax - National Insurance

Home > What is Tax? > National Insurance

What is National Insurance?

National Insurance (NI) is paid by individuals aged 16 or over, who are employed or self-employed. National Insurance contributions are collected by HMRC. The amount of national insurance that you pay depends on how much you earn. National Insurance payments determine your entitlement to a State Pension, as well as certain other benefits.

National Insurance was introduced in the UK in 1911, as a scheme allowing workers to buy ‘stamps’ that entitled them to health, pension, and unemployment benefits. After the Second World War the National Insurance system became compulsory and was incorporated into the new Welfare State. Since 1975 National Insurance rates have been earnings-linked, meaning that a percentage of earnings is paid instead of a single flat amount.

National Insurance is only paid on earnings and certain benefits. It is not paid on income-generating assets such as savings or rental income.

To find out more about National Insurance please follow the links below:

* Who pays National Insurance?

* What are the different types of National Insurance?

* What is National Insurance used for?

* Do your National Insurance payments affect your Pension and Benefits?

* How much National Insurance should I pay?

Who pays National Insurance?

Everyone who works in the UK, who is over 16 but under State Pension Age (currently 65 for men, 60 for women), must pay National Insurance contributions, but only if their earnings are over a certain amount. If you are receiving Job Seekers Allowance your Class 1 NI Contributions are paid for you, which means that you will continue to build up your entitlement to a State Pension.

If you are earning a wage in the UK you should be given a National Insurance number (NI number). Many people receive this when they turn 16 years old, but if you arrive in the UK to work as an adult you will usually need to apply for one. Your NI number is used to record your National Insurance contributions, and you will need it to claim many of the different state benefits.

In some situations you can choose to continue making National Insurance Contributions even if you are not earning enough to require that you do so. This may apply if you are out of work and not claiming benefits, or if you are working overseas and want to continue building up your State Pension Entitlement.

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What are the different types of National Insurance?

  1. If you receive a wage from an employer, your Class 1 National Insurance contributions are usually deducted directly from your wages.
  2. If you are self-employed, you should pay Class 2 National Insurance contributions. If you earn above a certain amount, you should also pay Class 4 National Insurance contributions.
  3. The different types of National Insurance contributions are all paid directly to the same HMRC fund, and then used by the government in allocating state benefits including the State Pension.

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What is National Insurance used for?

All National Insurance payments go directly to HMRC, and are placed in a fund that the government uses to pay certain benefits including Job Seekers Allowance and the State Pension.

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Do your National Insurance payments affect your Pension and Benefits?

Your own personal National Insurance contributions are used to determine your eligibility for certain benefits. In most cases the actual amount of money that you have paid is not considered, what matters is that you have paid the full rate of National Insurance contributions for your earnings for a certain period of time. For example, the amount of money you receive for your State Pension depends on the National Insurance contributions you have made over your lifetime. For men born after 1945 and women born after 1950, you will receive the full state pension if you have made 30 full years of NI contributions. People born before these dates usually need 44 years (for men) or 39 years (for women) of NI contributions to qualify for the full state pension. If you have paid National Insurance contributions for fewer years, the amount of State Pension you receive is reduced accordingly.

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How much National Insurance should I pay?

The amount of National Insurance that you pay depends on how much you earn, and whether you are employed or self-employed. For Class 1 National Insurance you pay 12% of everything you earn between £139 and £817 per week, and 2% of everything you earn after £817. If you earn less than £139 per week there is no deduction made for National Insurance. In some cases you may need to pay less National Insurance if you are on a certain kind of employee pension scheme.

If you are self-employed and you earn over a certain amount (£5315 in 2011-12), your Class 2 National Insurance payments should be made directly to HMRC, either monthly or six-monthly. The standard rate is £2.50 per week.

The amount of Class 4 National Insurance that you pay depends on your earnings. In 2010-11 the amount due is 8% of profits. In 2011-12 the amount due is 9% of any profits over £7225 and up to £42475, and 2% of any further profit. The amount you owe is calculated according to the information on your Self Assessment tax return.

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