National Insurance contributions and income thresholds
UK employees, employers and the self-employed pay National Insurance (NI) contributions. These payments qualify people to access certain benefits and services, including the National Health Service (NHS), maternity pay, unemployment benefits or disability allowance and a state pension.
NI contributions are mandatory and the earnings thresholds at which certain NI classes apply change each year. NI is deducted from the gross income of an employee or a sole trader. Generally, higher earners will be required to make higher insurance contributions, and there are no NI income caps in the UK.
What are the different NI classes and contribution rates?
The different NI classes are shown in the following table. Which type of NI and how much you pay, depends on your employment circumstances.
| NI class | Applicable to |
|---|---|
| Class 1 | Employees below the State Pension age who earn over £166 a week |
| Class 1A or 1B | Paid by employers on benefits and expenses employees receive |
| Class 2 | Self-employed who earn more than £6,365 per year |
| Class 3 | Voluntary contributions |
| Class 4 | Self-employed who earn more than £8,632 per year |
Class 1 (including A and B) contributions are usually deducted by your employer from your pay cheque. Self-employed people pay two types of NI – class 2 and class 4 contributions. Voluntary contributions are useful if you want to increase your pension or jobseeker’s allowance, for example. Now let’s take a closer look at each NI class and what NI income thresholds apply.
NI Class 1
If you’re employed, you’ll need to pay Class 1 NI contributions. This is also the case for directors of limited companies who pay themselves. Employers will automatically withhold the relevant NI rate from an employee’s pay depending on their category. For example, married women, employees over the state pension age or those younger than 21 years all pay different rates. Most employees will fall within category A. In this case, their NI contributions amount to 0% up to a weekly pay of £166. Any pay between £166.01 to £962 is charged at 12% and an additional 2% are taken from pay over £962. Employers will pay an additional percentage of NI contributions for their employees, which is usually around 13.8%.
Class 1A and Class 1B NI is paid on certain benefits that your employer provides such as a private company car or expenses and benefits.
NI Class 2 and 4
If you’re self-employed or in a partnership, you pay Class 2 NI contributions on profits over £6,365 and Class 4 NI on profits over £8,632 or more per year. The current rate for Class 2 is £3 per week and that for Class 4 is 9% on any profits between £8,632 and £50,000 and 2% on earnings over £50,000. Both Class 2 and 4 contributions are usually automatically calculated when you submit a tax return online. There are some roles such as examiners, religious ministers or people who deal with property who are not required to make NI contributions. However, people in these roles may want to make voluntary contributions.
Where an employee is also self-employed, they need to pay both Class 1 and Class 2 and 4 NI contributions. However, people with more than one job can reduce their NI payments on one of them or delay making payments.
NI Class 3
Paying National Insurance voluntarily may make sense if:
- You’ve missed payments
- You were employed or self-employed but your earnings were too low
- You were unemployed (without benefits)
- You lived abroad for a while
To find out if you should pay Class 2 or Class 3 NI voluntarily, you can check your NI record online. Class 3 NI rates are £15 per week for 2019/20. It’s important to know that if you’re about to retire and are trying to increase the amount of pension you receive from the state, leaving voluntary payments too late may not increase your pay-out rate. It’s best to contact HMRC or speak to a financial advisor if you want to find out how much you would have to pay to receive a desired pension.
Students under the age of 16 years and pensioners at state pension age are usually exempt from paying NI.
The future of National Insurance – why it is running out
The Great Britain National Insurance fund is projected to run out by 2032. That’s because as more Baby Boomers retire over the coming years, they’re going to deplete the fund’s reserves at a greater speed than it is being paid into by the remaining working population.
Suggestions to fix the problem and restore the fund include a ‘Treasury Grant’ and increasing the NI contributions. According to experts, an increase of 5% in NI contributions would be needed to plug the gap. The alternative is to increase the state pension age. Part of the problem with abolishing the state pension altogether is that current workers are essentially paying pensions for an older population but they themselves may never receive a pension.
Please note the legal disclaimer relating to this article.