National Insurance: how it works, what it funds, and how it affects your state pension
National Insurance #NationalInsurance
National Insurance (NI) is the tax (though it’s not technically a tax in the strictest sense) paid by workers under state pension age to fund the UK’s state benefits, most notable of which is the state pension.
Today the Chancellor Jeremy Hunt announced that the Class 1 National Insurance rate will drop from 12pc to 10pc from January 6 2024. This is paid by employees earning between £12,570 and £50,270.
It means the average worker on £35,000 will save more than £450 a year as a result.
Additional changes are being changed for self-employed National Insurance from April 2014, when Class 2 contributions will be scrapped altogether and the Class 4 rate will drop from 9pc to 8pc.
On average, this will save two million self-employed workers £350 a year.
Racking up enough National Insurance contributions (NICs) over your working life can be the difference between getting an extra £10,000 a year in government payments when you reach retirement.
Here, Telegraph Money explains what NICs cost, how to find out whether you have gaps in your record, and how to fill them.
What is National Insurance?
NI has been around since 1911. Introduced by Lloyd George, it was created to provide a national system of insurance to protect the poorest members of society from facing a loss of income as a result of sickness or unemployment.
It’s changed a bit since then, but given payments also fund new style jobseeker’s allowance, maternity allowance and contribution-based employment and support allowance, some of its fundamental principles of helping those worse off are still in place today.
You are legally obliged to pay NICs once you are aged 16 and in work. You’ll usually be issued with a NI number just before you turn 16. This is made up of two letters, six numbers and a final letter – and is unique to you.
All sorts of people and bodies may need to know your NI number, such as HMRC, employers and pension providers, your local council, student finance agencies, banks, building societies and other financial services.
You will continue to pay contributions until you reach state retirement age. After this, you no longer have to make payments, even if you still have a job.
The amount you pay depends on how much you earn; the type of contribution – known as the ‘class’ – you pay depends on whether you work for an employer or for yourself.
Forthcoming changes aside, NI has been tinkered with frequently over the past few years.
Boris Johnson’s government decided to raise NI by 1.25 percentage points in April 2022 to fund health and social care. The rate was due to return to 2021-22 levels in April 2023, when a separate new 1.25pc Health and Social Care Levy was due to take effect.
Kwasi Kwarteng, briefly chancellor, reversed the rise in the September 2022 “mini Budget” and cancelled the planned introduction of the levy.
To make things more complicated, in March 2022 Mr Johnson’s government had previously raised the income threshold, above which NI is charged, to align it with the income tax “personal allowance” at £12,570. This saved the average employee (and self-employed worker) around £300 a year.
At one point there was also a plan to make pensioners pay NI but this was dropped.
Classes of National Insurance
There are four main classes of NICs, which are split up like this:
Class 1 NICs are paid by employees who earn over a certain income threshold
Class 2 is a flat weekly rate paid by self-employed individuals with profits over a certain threshold
Class 3 contributions are voluntary contributions paid by those wanting to plug the gaps in their NI record, so they can qualify for certain benefits, such as the state pension
Class 4 NICs are paid by self-employed workers, depending on their profits.
From April 2024, Class 2 NI will be abolished.
National Insurance contributions: how much you payEmployees Class 1 contributions
As an employee, you pay NI contributions when you earn more than the ‘primary threshold.’ This changes over time, but at the moment, it is £242 a week (£12,570 a year).
You will pay Class 1 NICs of 12pc on income between £242 and £967 a week (or between £12,570 and £50,270 a year). You then pay contributions of 2pc on any earnings over £967 per week (or £50,270 a year).
If your income falls below the £242 per week (or £12,570 a year) “primary threshold” you do not need to pay anything, but you will have a gap in your contributions record – unless you qualify for NI credits, allocated when you claim things like child benefit and Statutory Sick Pay. More on this later.
From January 6 2024, you’ll pay 10pc over the ‘primary threshold’.
Self-employed Class 2 and 4 contributions
If you work for yourself, you pay NI when you make more than £12,570 a year in profit.
You might make two types of contribution: a Class 2 weekly flat rate of £3.45 per week, and a percentage Class 4 contribution, charged at 9pc on profits between £12,570 and £50,270, and 2pc on profits over £50,270.
If your profits are less than £12,570 but more than £6,725 you’ll be treated as though you pay Class 2 contributions, but if profits are less than £6,725 you’d have to make voluntary Class 2 contributions to have NICs recorded.
From April 2024, Class 2 contributions will be abolished. Those with profits of more than £12,570 will come under the scope of Class 4 contributions, and will therefore continue to make NI contributions.
Those with profits between £6,725 and £12,570 will get NI credits so they continue to contribute to benefits entitlement such as the state pension.
Additionally, the Class 4 rate will reduce to 8pc. Payment thresholds are due to stay the same.
What if I’m both employed and self-employed?
If you fall into both working categories, you need to pay both Class 1 NIC on your employed income and you may have to pay Class 2 and 4 NIC for your self-employed work.
Voluntary Class 3 contributions
If you have gaps in your record, you might be able to make voluntary contributions to fill them.
For the 2023-24 tax year, the weekly Class 2 rate is £3.45, and the weekly Class 3 rate is £17.45.
National Insurance credits when you’re not working
NI credits are a means by which you can maintain your NI record when you’re not making NI contributions.
Becky O’Connor of PensionBee said: “If you take any time out of paid work, or don’t earn enough to qualify for the basic state pension, you need to look up whether you are eligible for NI credits.”
You might be eligible for credits if, say, you are unable to work due to illness, or because you are caring for someone.
Ms O’Connor added: “For example, parents taking time out of work to look after young children are eligible for credits [when they claim child benefit] for years when they aren’t working, but are still making a valued contribution to society.”
The type of credits you receive can vary. Those receiving child benefit will automatically receive Class 3 credits, while anyone who gets Carer’s Allowance, Maternity Allowance or Employment and Support Allowance will automatically receive Class 1 credits.
Changes for parents with unclaimed NI credits
For women who are claiming for missing years of NI credits after taking time out of work to care for children, it is now possible to make claims dating back up to 12 years. This follows a recent intervention from the Government. (Previously, it was only possible to backdate claims for up to three months).
Ms O’Connor said: “This was a particularly important decision because many women were missing out on NI credits as a result of not claiming child benefit, which is the main method the Government uses for determining eligibility for credits.”
You can claim child benefit up to a child turning 12, meaning a parent of one with unclaimed credits could have a 12-year gap on their NI record.
Laura Suter, head of personal finance at AJ Bell said: “As this would leave you short of the full 35 years of credits you’d need to be entitled to the full state pension, that would equate to £3,634 a year in state pension you’d miss out on. Allowing parents to go back and fill in gaps on their record will help to boost the collective wealth of women when they retire.”
How National Insurance affects your benefits
Paying NI contributions provides the right to access certain contributory benefits, which you might need if you’re ever out of work, or when you reach retirement age.
This includes the new style Jobseeker’s Allowance, Maternity Allowance and – perhaps most notably – the state pension.
Ms O’Connor said: “The amount of state pension you get basically depends on the number of ‘qualifying years’ of contributions you have. To qualify for the new state pension, which pays £10,600 a year, you need to have made 35 years’ of NI contributions. To get any state pension at all, you need to have at least 10 qualifying years of contributions.”
Not all benefits depend on NICs – so your contributions won’t have a bearing if you claim the likes of Universal Credit, Attendance Allowance, Disability Allowance and Child Benefit.
How to check your National Insurance record
You can check your NI record for free on the Government website: https://www.gov.uk/check-national-insurance-record. You can also check by logging into your personal tax account online, or by writing to HM Revenue and Customs to request a statement at this address:
National Insurance contributions and Employers Office
HM Revenue and Customs
BX9 1AN
You should be able to see the record of payments you have made, or which credits you have received, as well as which class of contributions. You can also find out if there are any gaps, and whether it’s possible for you to pay voluntary contributions in order to plug those gaps.
If you want to know what your state pension forecast looks like, you can check here: https://www.gov.uk/check-state-pension.
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