National Insurance was introduced to the UK tax system in 1911 to provide workers with a safety net against unemployment and illness. Since its introduction, it has also expanded to include funding pensions and other benefits. Most of the UK workforce will see National Insurance contributions on their payslips, but not many will be aware of how it works or, indeed, that there are several different types for both the employee and the employer.
This RJF Accounting guide will break down everything you need to know about National Insurance contributions, from when you legally need to start paying them to the different levels payable. This blog post is about national employee contributions; if you are looking for advice regarding national employer insurance, check out another of our blog posts!
Blog Contents:
showWhat Is National Insurance?
National Insurance contributions form part of the UK tax eco-system for employers and employees. It entitles the employee to access various state benefits, such as State Pension, Sick Pay and Maternity Allowance. Several factors can determine the level and type of national insurance contribution payable, including:
- Employment status
- Age
- Level of earnings
- Residence status
From an employee perspective, National insurance, unlike income tax, is a non-cumulative tax. The more you earn in one tax period, the more you will pay, but unlike with a cumulative tax code, if you earn a lower amount for the rest of the year, you do not get any of the contributions back.
If you are self-employed and submit a Self Assessment Tax return, you will need to make additional payments based on your tax return, which will be in addition to any contributions made by PAYE.
How Much Is National Insurance?
The amount of National Insurance payable depends on which class the contributions fall into and who pays them. There are four main classes of National Insurance:
- Class 1 is paid by employees and employers
- Class 2 is paid if you’re self-employed
- Class 3 is a voluntary contribution
- Class 4 is paid if you’re self-employed and have profits over a certain amount
The rates for all contributions depend on the tax year they are being paid in and the allowances at the time of payment. We have provided the figures below as an example of the current tax year 2022/23:
Class 1
These are payable by all employees when they earn over £242 per tax week. The rates currently are:
- 12% of your weekly earnings between £242 and £967
- 3.25% of your weekly earnings above £967.
Class 2
Self-employed people can pay class 2 NI contributions in certain circumstances, such as when their profits are below the Small Profits Threshold. The current rate is fixed at £3.15 per week. If you are paying Class 2 contributions, you must pay them for every week or partial week worked in the tax year.
Class 3
Class 3 voluntary National Insurance contributions are designed to plug gaps in your National Insurance payments. The aim is to get you a higher State Pension. The amount required can vary, but the rates currently have a maximum weekly rate of £15.85.
Class 4
Class 4 national insurance contributions for the current tax year are payable on self-employed income over £9,559 up to £50,270 at a rate of 9%.
Remember the above rates are only for the tax year 2022/23 and are correct at the time of this blog being written; they are subject to change by the government and HMRC at any time.
What If I am Self-Employed & Employed?
If you are self-employed and employed simultaneously, say as a freelancer and an employee or as a company director and taking a salary via PAYE, you may have to pay contributions twice. Your Class 1 payments will be handled via PAYE, but you may also have to pay Class 2 and/or Class 4 payments when you complete your Self-Assessment tax return.
Helping You Make Sense Of National Insurance
If you are self-employed or run a business and need to make sense of National Insurance or run payroll for your employees, we can help you! RJF Accounting is a Manchester-based accounting team that helps start-ups, freelancers, and business owners access the advice and accounting services they need to make their businesses run smoothly. You can call the team on 0161 5040629 or email us at hello@rjf.uk.com to see if we can help you get your plans off the ground! We are open Monday to Friday, 9 am – 5 pm!