The breakdown of National Insurance payments is all about understanding what it is and how it works. Quite similar to income tax, National insurance is one of those deductions we’re mostly aware of as it impacts our pay. Insurance payments and finances are bound to get mind-boggling and keeping up with mathematical calculations can get very tiresome.
However, the business of National Insurance starts quite early on. Once you are 16 and earn a certain amount, you are bound to pay National Insurance contributions. It will facilitate building your entitlement to multiple benefits including the crucial ones like the State Pension and Maternity Allowance.
If you are new to the concept of National Insurance, you might have a burgeoning list of queries about what is national insurance, and rightly so. The complexities about how it works, how much you have to pay, and what the national government pays for can be puzzling.
To answer all your questions and concerns, this article will tackle all the salient features and aspects of national insurance in detail. Further, information regarding legal and financial intricacies is also involved, so continue reading to enhance your knowledge about national insurance.
What is national insurance?
Primarily, national insurance is defined as a tax on earnings paid by both employees and employers who are also counted as the people who are currently self-employed. Introduced in 1911, the insurance aims to provide a fund for workers who lost their job or needed medical treatment.
Now things have drastically changed and national insurance is used to pay for the NHS, benefits, and the state pension. The government can also borrow from the National Insurance Fund to pay for other projects. Moreover, the tax payment can help to build your entitlement to benefits depending on whether you are employed or self-employed.
Determining national insurance can be somewhat tricky since a plethora of social security providers majorly depends on the people who pay national insurance aka the national insurance contributions. Factors like employment status, age, and level of income much more can have diverse effects on the level of national insurance contribution that is required to be payable.
Why pay national insurance?
Structuring the NI system dates back to the mid-1900s and the major idea behind National Insurance payments was to provide a government safety net for workers who faced financial crises. Employees paid money into the scheme out of their wages. Back in the day, the citizens who required money for medical treatment or were facing unemployment could claim from
However, now the system has been significantly altered and an abundant amount of modifications have been made. Now, the question arises what does national insurance pay for? Currently, National Insurance is used to pay for The NHS primarily. The National Health Service (NHS) is a publicly funded healthcare system. Moreover, NH also pays for unemployment benefits, sickness and disability allowances, and the state pension.
After explaining in detail what national insurance is. The next crucial question that might arise in one’s mind is why do you need to pay National Insurance? At the first glance, paying National Insurance entitles you to some state benefits. The benefit count majorly depends on your employment factors. Hence, the state benefits will be varying whether you’re employed, self-employed, or making voluntary contributions.
The duration of paying the national insurance is defined and one has to pay for a certain amount of years to be entitled to receive the state pension. In case, one hasn’t met the criteria of payment for example the minimum amount of contributions has not been paid then the individual will not be qualifying for some benefits.
Does national insurance pay for the NHS?
The National Insurance Funds are used to pay for certain types of welfare expenditure and National Insurance payments cannot be used directly to fund general government spending. However, there are a significant amount of surplus funds that are majorly invested in government securities and hence this effectively lends lower rates of interest to the government.
Moreover, the contributions are paid into the various National Insurance Funds after the deduction of monies specifically allocated to the National Health Services (NHS). However, a small percentage is transferred from the funds to the NHS from certain of the smaller sub-classes. Does national insurance pay for the NHS? Yes, the organizations are partially funded from NI contributions but not from the NI Fund
What is the national insurance tax?
After delving into details about the significance and advantages of paying the national insurance, how much you have to pay the national insurance tax might sound a tad bit confusing.
Keep aside the overwhelming sentiments of being plundered into a rigmarole, such emotions can be easily eliminated; the calculations are not as hard as they seem. In simple words, the amount you’ll pay in National Insurance depends on the type and kind of National Insurance you’re paying. Dividing into categories, there are four main classes of National Insurance that determine the amount that needs to be paid.
Class 1 – Paid by employees and employers
Class 2 – Paid if you’re self-employed
Class 3 – Paid by voluntary contributors
Class 4 – Paid when you are self-employed and have profits over a certain amount
Class 1 – If you are employed, how much to pay?
Class 1 deals with the National Insurance Rates in the case that the individual is employed or is an employer. Let’s understand the entire process of payment through a simple example that will focus on the employee’s salary and the deduction due to National Insurance.
Suppose that you are earning more than $184 per week and you start to pay national National Insurance. We have already concluded that the National Insurance rate that one has to pay depends on how much you may earn.
Hence, the following is the breakdown of the required payment: 12% of your weekly earnings are between $184 and $967, and 2% of your weekly earnings are above £967. Now, for example, you have a monthly salary of 1,000 a week. You will be paying
- nothing on the first £184
- 12% ($93.96) on the next $783
- 2% ($0.66) on the next $33.
It is pertinent to mention that as an employee your National Insurance contributions stop when you reach the State Pension age. Class 1A or 1B deals with employers who pay these directly on their employee’s expenses or benefits
Class 2 – National insurance self-employed
Class 2 contributions are paid by people who are self-employed and do not work under any company.
Class 2 National Insurance contributions are set at a flat-rate weekly contribution of £3.05/week in 2020-21 and 2021-22.
Hence, the self-employed citizens have to pay every week or partial week of self-employment in a tax year. The following case is valid if the profits of the entire tax year are the Small Profits Threshold or greater in 2021-22.
In the instances where the profits are below the Small Profits Threshold, paying Class 2 contributions is voluntary for self-employed people. It is important to mention that if the self-employed people are paying the Class 2 National Insurance contributions despite low profits, it can still assist in building contributory entitlements to benefits.
Class 3 – Voluntary national insurance rates
After employees and self-employed, the next comes the Class 3 voluntary National Insurance contributions. This division is designed and created to fill in the possible gaps in a citizen’s National Insurance record.
The major aim of Class 3 voluntary National Insurance contributions is to provide the individual with a higher state pension. Furthermore, the higher state pension can be achieved by fulfilling certain criteria where the first and foremost requirement is that an individual needs to have at least 35 qualifying years of National Insurance contributions.
In case one has not fulfilled the required hours, then he/she will receive a reduced State Pension. The new State Pension requires that the person has a minimum of ten qualifying years. Those who have not completed enough qualifying years are advised to pay Class 3 voluntary contributions to boost their pension entitlement. As for the previous statistics, Class 3 contributions were payable at a weekly rate of £15.40 in the year 2021-22,
Moreover, there is a possibility that one might not always be able to pay Class 3 contributions for a tax year. Hence, it is essential to conduct detailed research over the concerning topics regarding whether one can make payments towards any gaps or how much you are required to pay.
Class 4 – National insurance rates
Last but not the least, we have an insight into the national insurance rate in the case where you are self-employed and make high profits of a certain amount. The self-employed people who are earning well alongside handsome profits will be paying Class 4 National Insurance contributions.
Here we discuss a fairly easy example to gain insight into the mathematical working and logical aspects of the payments. Assume that you are self-employed and your profit gain is over a certain threshold (as described in the criteria), then you will be paying 9% on profits between £9,559 and £50,270 in 2021-22 and 2% on profits over £50,270.
When will I pay National Insurance?
Do you get paid through a Pay As You Earn (PAYE) system? Then National Insurance contributions will be automatically deducted from your salary, so you won’t need to do anything.
It applies to each pay period. Depending on how often you get paid, it could be weekly, monthly, or a different time period. This means if you earn extra in one month, you’ll pay extra National Insurance. But you won’t be able to claim the extra back, even if your pay is lower during the other months of the tax year. Are you self-employed? Then your National Insurance contributions will be calculated based on your Self Assessment tax return. They’ll be paid at the same time as Income Tax.
National Insurance increase
Inflation has emerged as a new war forefront after battling the coronavirus. The National insurance contributions will rise from April 2022. The increase has been made to fund a health and social care levy. Everyone including the employees, employers, the self-employed, and pensioners will be hit by higher tax bills.
Earlier, the pensioners were not required to pay national insurance after reaching the state pension age. However, according to the new rules, everyone will have to pay the new levy on their earnings if they are still working from April 2023.
What does national insurance pay for part-time workers?
National insurance is a tax on ‘earned income’ – so that’s money you get through paid work, not from anything you earn in the way of interest or profits on savings or investments. Before you can start paying NI, you’ll need a national insurance number. This is your own unique number, with a combination of letters and numbers, which is sent to you by the Department for Work and Pensions.
In the aforementioned paragraphs, we have discussed in detail the amount of income tax and national insurance the employed class has to pay. Now, we will be discussing the route one has to follow if they are working part-time or earning a lower income than the predefined threshold.
If you have earnings above the lower earnings limit and below the primary threshold (£184 per week or £797 per month for 2021/22), in that case, you will not have to pay any Class 1 NIC. However, your NIC record will be credited considering you have paid Class 1 NIC at a zero rate. While this might earn you entitlement to contributory benefits and the state pension, you might be unable to avail of some other benefits.
On the other hand, if you earn less than the lower earnings limit (£120 a week for 2021/22) then you pay no Class 1 NIC and you do not avail any benefits attached to the NIC record. Paying NIC through at least one job will help you to qualify for the state pension and certain other contribution-based benefits. You can find out more about the state pension on the GOV.UK website. You will need 35 qualifying years’ worth of contributions to get the full amount of the state pension. You have until you reach the state pension age to make those contributions.
National insurance credits
Further, we discuss the terminology ‘National Insurance credits’ and how the following work at a larger scale.
National Insurance credits are an easy way of maintaining your National Insurance record when you are not making National Insurance contributions.
The aforementioned credits will help facilitate the individual to build up ‘qualifying years’. The following qualifying years will be counted towards your entitlement.
Entitlement to National Insurance credits
After the birds-eye view of National Insurance credits, we now dive into the intricacies and working of these credits. The general notion explains that the people who are qualified and meet the criteria of the credits are not making the contributions because they are not in paid employment.
The reason behind discounted employment can be listed as personal and professional reasons both. The possible reasons include maternity/paternity leaves, prolonged illness, unemployment, or other private reasons.
Moreover, citizens are also eligible and can receive National Insurance credits when they are on an approved training course or busy performing jury service. National Insurance credits are divided into two categories. The two types are discussed in detail below.
- Class 1 covers State Pension and bereavement benefits along with other benefits like Jobseeker’s Allowance or Employment Support Allowance.
- Class 3 credits only count towards your State Pension and bereavement benefits
Childcare and National Insurance credits
The benefits of National Insurance credits also extend to children. As per the criteria, the parents (aged over 16) who receive child benefits and are caring for a child under the age of 12 receive Class 3 National Insurance credits automatically.
Moreover, grandparents and other family members aged over 16 but under state pension age that provides care for a child may also be able to get Class 3 Specified Adult National Insurance credits. While for parents the credits are applied automatically, the grandparents or other family members are required to apply for these credits with the help of form CF411A.
In the scenarios where Carer’s Allowance is received, the contributor will automatically receive Class 1 credits on his/her National Insurance record.
Furthermore, the people on Income Support automatically qualify for Class 3 benefits but if they are not on Income Support and providing at least 20 or more hours/week to a sick or disabled person, they are eligible for Class 3 credits.
Unemployment and NI credits
Unemployment and NI credits scenarios have also been dealt with with utmost care as according to the standards, the people who receive Universal Credit will automatically qualify for Class 3 National Insurance credits.
For the job seekers or potential candidates, they are eligible for Class 1 credits. The following credits will be automatically added to your record if he/she is receiving Jobseeker’s Allowance.
In case an individual is unemployed and not receiving Jobseeker’s Allowance, they are advised to claim the Class 1 credits via your local Jobcentre. If you’re sent by a JobCentre Plus, the credits will be added automatically.
There are other interesting options to successfully avail the Class 1 credits. If you attend a government-approved training course that’s less than one year long, you can avail of the credits.
Illness and disability NI credits
The sickness, illness and disability clauses have also been kept under consideration. The scenarios where an individual is unable to work due to illness, physical or mental disability, they can automatically receive National Insurance credits.
However, the predecessor condition is that the certain individual must be are claiming the following benefits as listed below:
- Employment and Support Allowance
- Unemployability Supplement or Allowance.
There is the possibility that the above-mentioned benefits have not been claimed or not received, then it is advisable to claim the Class 1 credit via your local Jobcentre.
As for the other occurrence, the citizen might be receiving Statutory Sick Pay but not earning enough to make a qualifying year for National Insurance. Then he/she is eligible for Class 1 credits.
Jury duty and NI credits
Above we mentioned that Class 1 National Insurance credits can be easily received in case the concerned person has been attending the court for jury duty and is not self-employed.
However, the credits will not be automatically transferred in the following case, Rather, the person will need to apply for these in writing from HMRC. The offices that need to be notified are the National Insurance contributions and Employers Office, HM Revenue and Customs, BX9 1AN.
Check my national insurance contributions
Once you have safely concluded which National Insurance Class you lie in, the next process that follows is the transaction process and the way the contributions need to be made. For employed individuals, National Insurance is automatically deducted from your monthly pay and hence you will be freed from the hassle of organizing these contributions,
But the self-employed will be required to organize these contributions yourself. The process is initiated through your self-assessment tax return. Either way, it is advisable to ensure that you pay the right amount of tax and for that, it’s essential to check and confirm that you have the correct tax code.
Moreover, the policyholder can also request a printed National Insurance statement online or by phone. But requesting it through the following means, one will need to say which years you want your statement to cover. You cannot request statements for the current or previous tax year.
You can check your National Insurance record online to see:
- what you’ve paid, up to the start of the current tax year (6 April 2022)
- any National Insurance credits you’ve received
- if gaps in contributions or credits mean some years do not count towards your State Pension (they are not ‘qualifying years’)
- if you can pay voluntary contributions to fill any gaps and how much this will cost Your online record does not cover how much State Pension you’re likely to get.
What benefits do national insurance pay for?
Below are the benefits which depend on national insurance contributions NIC:
- Maternity Allowance
- Contribution-based/New Style Jobseeker’s Allowance (JSA)
- Contribution-based/New Style Employment and Support Allowance (ESA)
- Bereavement Benefits
- Basic State Pension
- New State Pension
Here, we list down a plethora that does not depend on national insurance contributions NIC:
- Attendance Allowance
- Disability Living Allowance (DLA)
- Personal Independence Payment (PIP)
- Child Benefit
- Guardian’s Allowance
- Universal Credit
What happens if I don’t pay national insurance?
Above we have thoroughly discussed what national insurance is and the benefits it will pay for. Now, we will ponder over the consequences that might occur if one does not pay national insurance. If citizens who earn a certain amount are failing to pay the national insurance, then they can expect to get fined.
The HM Revenue and Customs (HMRC) will penalize the people who have failed to make the
payments towards monthly, quarterly or annual PAYE UK taxes, Class 1 National Insurance contributions (NICs), and the Construction Industry Scheme (CIS), or student loans. The serious repercussion is required to enforce the law and prove that payment of National Insurance in mandatory
Moreover, if the individual has not paid the national insurance still they will receive a Notice of Penalty Assessment, after which they have a timeframe limit of 30 days to pay the penalty. The HMRC will inform you in detail of the missed payment and penalty, how to pay it and what to do if you wish to appeal the decision.
The notification application/letter will mainly include a unique ID for each individual penalty. So, it is most favorable to pay the penalty at the earliest opportunity considering the condition which highlights that a hefty amount of daily interest will accrue on any unpaid amounts after the due date.
Despite earnings, the citizen still fails to pay the amount in full by six months, then he/she will be charged 5 percent extra on unpaid amounts. Moreover, this increases to 5 percent after 12 months if payments remain unsettled. Penalties are charged for both end-of-year adjustments and amounts due annually or occasionally.
