National Insurance is a part of life, regardless of whether you’re self-employed, on a zero-hour contract, employed full-time, or the director of a business.
Most of us pay National Insurance throughout our working lives, but how much do you know about National Insurance? What exactly is it? Where does it go? And why do we need to pay it?
Keep reading to learn all about National Insurance, including why we pay it, how much you should be paying, and what a NI Number is.
What is National Insurance?
National Insurance is essentially a tax on any earnings or profits that you should pay if you’re self-employed, an employee, or an employer.
National Insurance deductions and payments first came about back in 1911 to provide a safety net for any workers that may be struggling financially. This meant that anybody who needed to pay medical costs could take the funds from the National Insurance fund.
National Insurance is paid out of wages or profits, whether it be from every payslip or through the annual tax return.
By paying National Insurance, you’ll gain entitlement to benefits such as Maternity Allowance or State Pension, Statutory Sick Pay, as well as unemployment benefits. However, this depends on the National Insurance History. You can check this by contacting HMRC or by logging into the government online portal.
Why Do We Pay National Insurance?
One of the main reasons that we pay National Insurance is to gain entitlement to the State Pension – however, you’ll need to pay into the NI fund for a set total of years. Currently, you should pay a minimum of 39 years worth of National Insurance to be eligible for the full State Pension.
However, you can still receive some State Pension if you have a minimum of 1o qualifying NI years. You may also be able to qualify for additional State Pension – but again, this depends on your total contributions.
In 2022, National Insurance payments go to a variety of systems – the main ones being the NHS (National Health Service) and State Pension. Funds also go towards unemployment benefits and sickness and disability allowances, giving workers something to fall back on if needed.
National Insurance funds are separate from other government funds – so the money raised for National Insurance can only go towards certain areas. It’s not supposed to be spent on other community departments such as the police or building schools.
However, the government may borrow funds from National Insurance to spend on other projects when necessary.
How Much National Insurance Should I Be Paying?
The amount of NI you should pay depends on several things – your earnings, age, employment status, and residence status.
If you’re an employee, then your NI will be automatically deducted from your paycheck. However, if your employment status is self-employed, then it’s your own responsibility to arrange your NI contributions through your annual self-assessment tax return.
If you’re an employee or employer, then you’ll pay Class 1 NI. If you’re self-employed, then you’ll pay Class 2. You can also make voluntary contributions which falls under Class 3. You’ll pay Class 4 if you’re self-employed but your profits are over a certain threshold.
Once you get to state pension age (late 60’s depending on your date of birth), you’ll no longer be required to pay NI contributions.
Always be sure that you check you’ve got the right tax code, as this ensures that you’re paying the correct amount of tax.
What Is A National Insurance Number?
Almost all of us were given a National Insurance Number just before we turned 16 years old, and many people can recite theirs without having to check their National Insurance card.
It’s a way that you can be identified – so everybody will have a different NI number. It consists of both numbers and letters, following this pattern: AB123456C.
National Insurance numbers are a way of ensuring that any NI contributions are recorded correctly, and don’t get mixed up with others. The government can identify you through your NI Number alone and can help to track your tax allowances.
You’ll have the same NI Number throughout your life, regardless of marriage, unemployment, name changes, or civil partnerships.