What is national Insurance
National insurance contributions are payable to create an entitlement to certain state benefits, including the state pension.
The amount of national insurance a person pays depends on their employment status, i.e. whether they are employed or self-employed, and their level of earnings. Since national insurance
contributions are the entitlement to state benefits a person ceases to make contributions once they reach the state retirement age.
What is national insurance - Who is liable?
If a person is an employee or self employed and over the age of sixteen years old they are liable to make national insurance contribution payments, provided they earn more than a minimum threshold.
When an employed person reaches the state pension age the contributions stop, even if the person remains in full time employment. When a self-employed person reaches the state pension age class two national insurance contributions stop and class four contributions from the start of the tax year after the one in which the person reaches the state pension age.
There are instances when a tax payer may decide to make voluntary contributions in order to retain their entitlement to state benefits. Circumstances for this would include;
1) Where a person is not working and not claiming state benefits
2) Where a person has not made enough national insurance contributions to qualify for the state pension or other long term state benefits
3) Where a person lives abroad but still wants to maintain their entitlement to state benefits
What is national insurance - The national insurance number
When a person reaches the age of sixteen years old they will receive a national insurance number, which is their own personal account number. The reason for the national insurance number is to ensure that all contributions and tax payments are properly recorded and allocated to the right person. After all, it would not be right if someone’s national insurance contributions were deemed to be from someone else. The national insurance number also acts as a reference number for the social security system.
Once a person receives a national insurance number it is their number for life and will never change, regardless of what happens. A person can get married, change their name or move abroad and their national insurance number will remain with them.
There are various people who will require sight of the national insurance number including employers, HM Revenue & Customs, the Department for Work & Pensions (which includes jobcentre plus and pension, disability and carers service), the local council (when claiming housing
benefit) and the student loan company (when applying for a student loan). The national insurance number also has to be given when applying for an ISA.
The national insurance card is a very important document and it is crucial to keep national insurance numbers safe so they cannot be used in identity theft or for fraud.
What is national insurance - State benefits that depend on national insurance contributions
The entitlement to state benefits, such as the state pension, contribution-based jobseekers allowance, contribution-based employment and support allowance and bereavement allowance, and the amount a person receives depends on their national insurance record.
In some instances the entitlement and amounts can also depend on a person’s spouse or civil partner’s national insurance contributions.
What is national insurance - The different types
There are four different classes of national insurance contributions a person can pay, and the precise one will depend on specific circumstances.
An employee will pay class one national insurance contributions that are collected through the PAYE scheme. Class one contributions are calculated on a person’s gross salary. If a person earns more than £139 per week but less than £817 per week the national insurance is calculated at 12%. If a person earns more than £817 the national insurance is calculated at 12% on the first £678 income charged to national insurance is charged at 12% and the rest is charged at 2%.
A self-employed person will pay class two national insurance contributions at a flat rate of £2.50 per week. If a self employed person earns less than £5,315 class two contributions are not due. A self employed person is liable for class four national insurance contributions which are paid as a percentage of the annual taxable profits. Class four contributions are 9% on profits between £7,225 and £42,475 and a further 2% on profits over that amount. Class four contributions are payable with a person’s income tax bill.
Class three national insurance contributions are voluntary contributions that are a flat £12.60 a week. Class three contributions are paid by monthly direct debit or by a quarterly bill. Class three contributions are for people who have not made enough contributions to be entitled to state benefits.
What is national insurance - The final word
You never know what is going to happen in the future and it is crucial you keep up to date with your national insurance contributions. Employers collect the contributions on behalf of their employees and pay them over to HM Revenue & Customs on their behalf, so it is almost impossible for an employee to fall behind. Self employed people, however, can fall behind in their contributions if they are not careful.
Falling behind in your contributions will affect your ability to state benefits and entitlements and since everyone is going to retire at some point and collect the state pension you need to make sure you never fall behind, or if you do pay over class three contributions and catch up.