What is National Insurance, how does it work and how much should I pay?

Since 1911 workers have paid National Insurance which, as the name suggests, was intended to fund various benefits to support the needy in society. Originally, sick or unemployed workers could make a claim on the fund, but today NI is used to pay for a much wider set of benefits with the state pension being the most expensive.

Despite popular belief, there is not a dedicated state pension fund from which the payments are drawn. Pensions are paid out using NI payments from current workers. At the moment, those receiving the state pension do not make payments however from April 2023, employed pensioners will start contributing.

What is National Insurance?

National Insurance is essentially a tax which counts towards your entitlement to state benefits and the state pension. It is paid on earnings above a threshold by employees, the self-employed and employers. 

If you do not have a full NI record, you may not be able to claim some benefits and may get less than the full state pension, currently £179.60 a week.

Low earners or people who do not work, or take a long period of time out of work to bring up children, for example, can make voluntary contributions to plug the gaps in their records and retain their entitlement to state support and retirement incomes. 

How do you get a National Insurance number?

You will normally be sent your NI number in the post, three months before you reach the age of 16. If you work, but do not have an NI number, you can obtain one by proving your identity and applying online via Gov.uk. You do not need an NI number to start work if you are able to prove your right to work in the UK. 

If you have lost your NI number, you should be able to find it by looking at your tax forms, including letters from HM Revenue & Customs, your payslips or a P60. 

How much National Insurance should I pay?

The amount you pay depends on how you work and how much you earn. NI rates are split between different classes and bands. Employees pay “class one” contributions. The tax kicks in on earnings in excess of £187 a week at a rate of 12pc and then at 2pc on all other earnings above £976 a week.

From April, these rates will rise to 13.25pc and 3.25pc after the Government increased duties to fund social care.

The self-employed pay slightly lower rates of either “class 2” or “class 4” contributions, depending on how much they make. 

“Class 2” is paid on self-employed earnings of £6,515 a year at a rate of £3.05 a week, while “class 4” starts at earnings of £9,568 at 9pc and then 2pc on anything above £50,270. This will rise to 10.5pc and 3.5pc in April 2022.

Employers pay 13.8pc but this will also rise to 15.05pc in April.

Voluntary contributions come under “class 3”. The rate for voluntary contributions is £15.40 a week for the current 2021-22 tax year, £15.30 for the year before, £15 a week for 2019-20 and £14.65 a week for the year before that.

When do you stop paying national insurance?

At the moment you stop paying NI when you reach the state pension age, at 66. The state pension age is scheduled to rise to 67 between 2026 and 2028.

However, the Government has announced a radical shift in this policy and from April 2023, all working pensioners will pay 1.25pc NICs on their earned income.

It will not be paid on income from the state pension, pensions or income earned via investments such as dividends and buy-to-lets.

Do you pay NI on pension income?

You do not pay any NI on pension income, although you may be liable to pay income tax. The tax-free annual personal allowance for income tax is currently £12,570. 

This guide is kept updated with the latest information.

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