National Insurance is the second largest tax in the UK after income tax, so it’s crucial that you wrap your head around it. If you struggle with tax and finance but want to understand what national insurance is, we have you covered. This blog will cover:
- What is National Insurance (NI) and how it works
- Why employers pay NI
- The different classes of NI
- NI rates and how to calculate them
- NI category letters
- Changes made to Employer’s NI in 2022
- What the NI Employment Allowance scheme is.
Let’s dive straight in!
What is National Insurance (NI)?
Simply put, National Insurance (NI) contributions are a tax on earnings paid by employers, employees, and self-employed individuals. Only employed people over the age of 16 who earn a certain amount must pay NI.
Paying NI will help you build your entitlement toward social security benefits such as a State Pension, Jobseeker’s Allowance, Maternity Allowance, and more.
Think of your NI contributions as an investment in your future. They can help you access important benefits you might depend on at a later stage in your life.
How Does National Insurance Work?
Although similar, NI is not the same as income tax.
If — and how much — you need to pay will depend on your personal circumstances. This includes your employment type, how much you earn, residence status, and age.
If you get paid through a pay-as-you-earn system, then your NI will be directly taken off your salary. However, if you are self-employed and are solely in charge of your finances, then you’ll have to fill out a self-assessment tax return.
Currently, employed individuals who earn more than £1,048 per month are legally obliged to make NI contributions.
In addition, if you earn more than £6,725 as a self-employed worker, you must also pay this tax.
Why Do Employers Pay National Insurance?
Employers are obliged to provide certain benefits to their employees, and one of these is to pay NI.
Employers paying NI is especially important, as it contributes to the social welfare system.
Different National Insurance Classes
How much NI you pay will depend on various circumstances. Luckily, there are different classes that explain each rate and show you exactly what you need to pay.
Class 1 is paid by both employees and employers.
Class 1 NI is partly deducted from employees’ gross pay and employers’ National Insurance contributions, which is an additional cost paid by the employer (not taken off the employee’s wages).
Class 1 rates are calculated by a category letter which indicates how much needs to be contributed by both employer and employee.
If you fall under class 1, it’s most likely that your NI contribution will be automatically calculated and taken off your salary before it reaches your account.
However, Class 1 NI is calculated as follows:
- If you fall under the primary threshold and only earn up to £242, then you don’t have to pay
- If you earn income between £242 and £967, your rate is 12%
- If you earn more than £967, you’ll need to pay 2%.
Class 1A is paid by employers who provide benefits-in-kind such as car hire or health insurance. Class 1A NI will be calculated on the value of the benefit-in-kind and paid by the employer.
Currently, this rate is 13.8%.
Similar to Class 1A, Class 1B is paid by employers if they have a PAYE Settlement Agreement.
The rate for Class 1B is also 13.8%.
If you are self-employed, then you need to pay Class 2 NI rates.
Self-employed individuals only need to pay Class 2 NI rates if they earn more than £6,725. If you earn less than £6,725, then paying NI is optional.
Currently, Class 2 NI rates are set at a weekly flat rate of £3.45.
NI Class 3 contributions are voluntary and aim to get you a higher State Pension.
People who have not made enough NI contributions can pay Class 3 to boost their pension entitlements.
The weekly Class 3 rate is currently £15.85.
So, if you are not making enough NI contributions but want to be entitled to social security benefits, then making Class 3 contributions is a great option.
If you are self-employed and earn more than £11,909 in a tax year, then you need to pay Class 4 NI rates.
NI Rates and How to Calculate Them
NI rates depend on how much you earn and the class rate you fall into. So, whether you are self-employed, or employed, how much you earn will affect how much you contribute.
To calculate NI rates, you need to find out your NI Category Letter first. You can also use a free NI calculator to easily calculate your rates!
National Insurance Category Letters
A category letter indicates how much your exact contribution rate is. Employers will use an employee’s letter to calculate how much each employee needs to contribute. As an employee, you can find this letter in your payslip.
Which National Insurance Category Letter you are given depends on your earnings, employment status, and other individual circumstances:
- The most common letter that most employees fall into is A
- B is used for married women and widows who can pay a reduced rate
- C is used for employees who are eligible for State Pension (ready to retire)
- Letter H is used for apprentices below the age of 25
- Letter J is used for employees that are already paying NI through another job
- Letter M applies to employees under the age of 21
- X is used for employees that are not required to pay NI
- Z is for employees under 21 that do not need to pay NI because they are already paying it on another job.
Changes to Employer’s National Insurance in 2022
As of April 2022, all employer and employee NI rates will be temporarily increasing by 1.25%.
These changes are due to the government’s efforts to help fund the NHS and social care across the UK, following the Covid 19 pandemic.
For employers that usually pay an employer rate of 13.8%, this rate has gone up to 15.05%.
Be sure to keep an eye out for any changes to NI rates and how much you’re paying!
What is the National Insurance Employment Allowance Scheme?
The NI Employment Allowance Scheme allows eligible employers to reduce how much NI they have to pay. This scheme is only applicable to individuals paying Class 1 NI and is up to £4,000.
This scheme may be helpful for small businesses that have been affected by high NI rates.
The Bottom Line
Understanding National Insurance is essential, whether you are an employer, employee, or self-employed in the UK. Make sure you know what NI category letter you fall under — remember, it may change! — and keep an eye on the NI section on the government website for any updates. Wrapping your head around this important tax is key for securing your financials, as well as qualifying for necessary welfare benefits you might need in the future.
The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.