Basic guide to understand national insurance

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National insurance.

You will nearly all have heard of it and the majority of you will pay it – but do you understand it?

Our article this week gives a basic guide to national insurance.

If you are aged 16 or over, and as long as your earnings are more than a certain level, you will pay national insurance if you are an employee or a self-employed person.

Contributions cease for an employee when you reach state pension age.

For a self-employed person, class 2 contributions cease at state pension age and class 4 contributions cease from the start of the tax year after the one you reach state pension age.

Every national insurance number is different and is made up of letters and numbers, such as this example –AB 12 34 56 C.

Your number will be your own and will never change even if you marry, change your name or leave the country.

It will record the contributions made to your account and is a reference number for the whole social security system as your entitlement to many state benefits depends upon your contribution record.

By far the most common benefit dependant upon your record is the state pension.

It is possible to obtain a state pension forecast which informs you of how many “qualifying years” you have – i.e. the years in which you have made enough contributions to make it qualify towards your state pension.

The type of national insurance you pay depends upon your circumstances.

Class 1

Employed persons and their employers pay this contribution which is earnings related and is made up of two elements :

1- Employee contribution (primary)

2- Employer contribution (secondary)

Employees pay contributions on all of the earnings above the earnings threshold (£111/£153 per week) at a rate of 12%.

A lower rate of 2% is applied to earnings above the upper earnings level (£805 per week).

Employers pay contributions at a rate of 13.8% on earnings above the current threshold of £153 per week.

Class 2 and 4

Self-employed people pay these contributions. Class 2 is paid at a flat rate (currently £2.75 per week).

However if your taxable profits are below £5,885 you may not have to pay as you could qualify for a small earnings exception.

Class 4 is paid as a percentage of your taxable profits (currently 9% on profits between £7,956 and £41,865 and a further 2% on profits above that level).

These are paid with your Self Assessment Tax payments in January and July each year.

Class 3

These are purely voluntary and are at a rate of £13.90 per week at present.

However, if you have gaps in your record you can also make one-off payments of voluntary contributions to fill the gaps.