National Insurance (NI) is the UK’s contribution fund that pays for and enables many vital state benefits, and it’s one of the two major taxes that you pay in the UK through job earnings, the other being Income Tax. The more you earn, the higher national insurance contributions you’re slated to pay.
But how do we calculate national insurance rates? In this article, Real Business will break down the factors that go into how much national insurance contributions a person has to pay.
Table of Contents
Factors Affecting National Insurance
Several factors affect the national insurance rates that you’ll pay as a standard combined with an employee’s earnings and employer contributions.
- Tax Years – As tax years go by, running from April 6th to April 5th the following year, the standard rates change. The government reviews NI Contributions annually and adjusts rates based on factors they follow, such as inflation, average earnings, and the need to raise revenue for the social security programs that help those in need. The rates are set in stone, and consistent, ensuring fairness to all taxpayers.
- Payment Frequency – Monthly and Weekly payments result in different deductions. The smaller the frequency, the lower the deductions.
Classes Of National Insurance (NI)
The different classes of NI Contributions are split between various types of workers and their income circumstances. Whilst the use of a national insurance calculator is valid, we feel as though it’s best to break down how NI Contributions are calculated.
Class 1 National Insurance Contributions – Standard Employees And Employers
Employees who work for an employer pay Class 1 National Insurance Contributions, provided they earn above what’s known as the “Primary threshold”. That threshold is changed by the tax year, however. For example, during the 2023 – 2024 tax year, the primary threshold was set at £12,570 per year. Employers also pay national insurance of this class on behalf of their employees if their earnings exceed the “Secondary Threshold”, which also changes by tax year.
Class 1A NICs revenue from your taxes pays for the following benefits and services:
- State Pension
- Statutory Sick Pay
- Maternity Allowance
- Bereavement Support Payments
- Employment and Support Allowance
- National Health Service (NHS)
How Is Class 1 National Insurance Calculated?
National insurance contributions are calculated based on earnings and state-applied national insurance rates yearly. For the 2023-2024 Tax Year:
- Employee National Insurance Contributions – 12% on earnings between the Primary Threshold (£12,570) and the Upper Earnings Limit (£50,270). Once you go above the latter figure, you pay 2% of all earnings.
- Employer National Insurance Rates – Employers pay 13.8% on earnings paid to their employees between the Secondary Threshold (£9,100) and the Upper Earnings Limit (£50,270). No additional rates are set for employers, though they may need to pay for certain benefits and expenses provided to employees (such as company cars).
How Are Class 1 Contributions Paid?
Class 1 NI Contributions are paid differently depending on whether you’re an employer or employee. Employees pay through the PAYE system, which is automatic for the employee. Employer national insurance contributions are paid through Full Payment Submission (FPS), which is done manually.
Class 2 National Insurance – Self-Employed
Those whose employment status can be described as “self-employed” are put into Class 2. Self-employed workers can be described as freelancers, sole traders, partners in a partnership or anyone who earns a living through work generated by themselves, for individual clients, whilst not being part of a company.
Class 2 NICs do not count towards State Pension. However, they apply for certain social security benefits:
- Maternity Allowance
- Employment and Support Allowance (ESA)
- Bereavement Benefits
- Credits Toward State Pension Entitlement
How Much National Insurance Contributions Is Paid In Class 2?
Class 2 NICs are calculated as a flat rate depending on the tax year. The tax year of 2023-2024 sets Class 2 NI Contributions at £3.45 per week.
The rules for when you pay Class 2 NICs are different, however:
| Annual Profit Level | Do I Pay Class 2 NICs? | How/When Do I Pay? |
| Below £6,725 (Small Profits Threshold) | No | No payment is required. |
| £6,725 – £12,570 | No* | Not required, but you can choose to pay voluntarily through a direct debit to HMRC. This helps build your NI record. |
| Above £12,570 (Lower Profits Limit) | Yes | Payment is usually due alongside your Self-assessment tax return by 31st January following the end of the tax year. You can pay online, by phone, or by post. HMRC will send you a payment request if you don’t file a Self Assessment return. |
Class 3 National Insurance – Voluntary Contributions
Class 3 NI Payments consist of voluntary contributions. They are made primarily to fill gaps in a person’s national insurance records. This enhances entitlement to certain state benefits, but in particular, your state pension.
You can enter this Class regardless of employment status. However, you must not be part of Class 1 or 2. For example:
- Employed Individuals – If you are employed, typically you’d be part of Class 1. However, if you’re not earning your Primary Threshold, then you can make contributions.
- Self-Employed – If your profits are below the Small Profits Threshold, and you cannot pay Class 2 national insurance contributions.
- Individuals Not Working – If you are not employed under any circumstance, then you’re fully entitled to make Class 3 Contributions.
Why Pay National Insurance Class 3?
The reason people pay voluntary contributions is to ensure they have enough qualifying years of NI Contributions to receive the full state pension. The UK State Pension Age is currently 66 years old, though it is gradually increasing over time.
The UK State Pensions system requires a minimum number of 35 qualifying years, though this depends on the Tax year. As of 2023 – 2024, the years are 35. The full state pension amount is £221.20 per week, as of May 2024.
However, you must understand that not all years are weighted equally:
- Full Qualifying Years – Years in which you paid enough NI payments or were entitled to credits (while claiming benefits, for example) count as a full Qualifying year.
- Partial Qualifying Years – Years in which you pay some national insurance, but not enough to count as a full year are considered partial. Whilst partial is not considered as weighty as full, the credit count scales your entitlement. The higher the credits, the more the State Pension.
- Stamps Years – Pre-1975 contributions can be added to your National Insurance records by paying a one-off fee.
The National Insurance Rates Of Class 3
Paying National Insurance Class 3 is paying a fixed rate of £17.45, as per the 2023 – 2024 tax year, and can be paid any time during it.
Class 4 National Insurance – High-Earning Self-Employment
Class 4 National Insurance Contributions are a form of tax payable by self-employed workers. Whilst Class 2 also encompasses self-employed people, this class differs in that it scales alongside your annual profits.
In Class 2, the lower earnings limit is key. If you earn below it, you’re in Class 2. However, if you earn above it, you are placed in Class 4.
Class 4 offers a significant advantage over Class 2:
- State Pension Contributions – Class 2 offered limited credits towards State Pension, however, Class 4 directly increases the amount of state pension you receive when you’re of age.
- Benefits Eligibility – Class 4 offers you benefits beyond Class 2, delving into New Style Jobseeker’s Allowance and Bereavement Benefits, for example.
- Tax Deductible – Class 4 NICs are a tax-deductible expense.
- Flexibility – Income fluctuations could be advantageous for businesses with variable earnings.
How Much Class 4 National Insurance Contributions Do You Pay?
The national insurance calculator equation for Class 4 is as follows:
- Lower Profits Limit vs Upper Earnings Limit – You pay 9% of profits exceeding the Lower Profits Limit (£12,570) up to the Upper Earnings Limit (£50,270).
- Above Upper Earning Limit – Above £50,270, you pay 2% on any profits.
Conclusion
Overall, this article should serve as a foundational guide for how National Insurance contributions are calculated.
FAQ: How is National Insurance different from Income Tax?
National insurance and Income Tax are both deducted from earnings and contribute to the UK’s public finances. But they serve different purposes.
- National Insurance – NI Payments are made to fund social security benefits, such as state pension and others. They are levied based on earnings from employment or self-employment and are paid by employees and employers both. They have different classes based on employment status, and their contributions directly affect the individual’s eligibility for the very state benefits they’re funding.
- Income Tax – Income tax funds a wider range of government spending, such as public services like the education sector. They are levied on a broad range of income sources, including pensions, savings interest, dividends and rental income. They are paid by all individuals with sources of income and have different bands with progressive rates. They do not directly impact any eligibility for specific benefits.
FAQ: Do I need to file a self-assessment tax return?
Not always.
- Class 1 NICs (Employees and Employers) – No. The PAYE system automatically takes care of your NI contributions.
- Class 2 NICs – Usually, Class 2 NICs are paid alongside a self-assessment tax return unless you’re below the small profits threshold.
- Class 3 NICs – No, this class can be paid to HMRC directly through various methods.
- Class 4 NICs – Yes, Class 4 NICs need the form, and they are calculated based on annual profits and are due at the same time as your income tax payment.
