National Insurance is a part of life, regardless of whether you’re self-employed, on a zero-hour contract, employed full-time, or a company director.
Almost all of us pay contributions towards National Insurance throughout our working lives, but how much do we know about it? To learn more about our guide to National Insurance contributions, continue reading.
What is National Insurance?
You pay National Insurance contributions to qualify for certain benefits and the State Pension. Essentially, National Insurance is a type of tax on earnings or profits that must be paid if you’re:
- Self-employed
- An employee
- An employer
People have been paying National Insurance contributions for some time. National Insurance was introduced in 1911 to provide a safety net for workers who might have been struggling financially.
This means that anyone who needed to pay payments regarding things like medical costs could take the funds from their National Insurance fund. National Insurance, like income tax, is paid out of wages or profits, whether it be from each payslip or through the annual tax return. By paying National Insurance, you’ll gain entitlement to benefits such as:
- Maternity Allowance
- State Pension
- Statutory Sick Pay
- Unemployment benefits
However, this typically depends on your National Insurance record. You can check your record by visiting the HMRC website or contacting them directly. You’ll be able to see:
- What you’ve contributed since the start of the tax year
- Any National Insurance credits you’ve received
- Whether you’ll benefit if you pay voluntary contributions
Why We Pay National Insurance
One of the main reasons that we pay National Insurance is to gain entitlement to things like State Pension – but, you’ll need to pay NICs 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.
Once you reach the state pension age, which is currently 66 years old (set to gradually increase by May 2026), you will have access to your pension funds. However, you can still receive some State Pension if you have a minimum of 10 qualifying NI years.
You might also qualify for additional State Pension – but again, this depends on your total contributions. Between 2024-25, the Office for Budget Responsibility forecasted National Insurance contributions to raise £168.1 billion. As well as State Pensions, National Insurance funds also go towards:
- Unemployment benefits
- Sickness and disability allowances
This gives 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 might borrow funds from National Insurance to spend on other projects when necessary.
How Much National Insurance Should You Be Paying?
The amount of National Insurance you should pay depends on several key factors, including:
- Your earnings
- Age
- Employment status
- Residence status
If you’re an employee, then your National Insurance will be automatically deducted from your paycheck. However, if your employment status is self-employed, then it’s your own responsibility to arrange your contributions through your annual self-assessment tax return. National Insurance rates vary, depending on how much you earn.
Employed
Your employer will automatically deduct Class 1 contributions from your pay for you. Your contributions will be taken from you if you’re under the State Pension age and earning more than £242 a week from just one job.
Self-Employed
The class you pay your National Insurance contributions depends on how much profit you make while working as self-employed.
If your profits are £6,725 or more a year, Class 2 contributions are treated as having been paid to protect your record, (which means that you don’t have to pay Class 2 contributions). However, if you’re self-employed and your profits are £12,570 or more a year, you’re required to pay Class 4 contributions.
Unemployed or Over State Pension Age
Those who are unemployed can make voluntary National Insurance contributions to help cover any gaps in their record. If you’re over the State Pension age, you won’t have to pay any National Insurance contributions anymore.
What is a National Insurance Number?
Almost all of us would have been 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.
Having a National Insurance number offers an easy way to be identified, meaning that everyone has a different NI number. It consists of both numbers and letters, following this pattern: AB123456C. National Insurance numbers ensure that any contributions are recorded correctly, and don’t get mixed up with others.
The government can identify you through your National Insurance number and keep track of your tax allowances by using it. You’ll have the same National Insurance number throughout your life, regardless of marriage, unemployment, name changes, or civil partnerships.
Tax Services at LJS Accounting Services
If you’re self-employed, it’s important to keep on top of National Insurance contributions. You will be able to arrange your contributions when you complete your self-assessment tax return. Here at LJS Accounting Services, we aim to make tax simple.
Our invaluable team of professionals works alongside clients to ensure their taxes are paid correctly. We can assist with both the preparation and submission of your tax return. We ensure that you meet the deadline to avoid any complications with the likes of HMRC.
To find out more about our services, we encourage you to get in touch today. We look forward to hearing from you soon.
Keli Evans, Director at LJS Accounting Services, excels in taxation and statutory accounts. With a focus on strong client relationships, she leads a diverse portfolio, overseeing vital financial aspects like VAT, payroll, pensions, and taxation with a holistic and committed approach.
