National Insurance

What is National Insurance?

National insurance (NI) was first introduced in 1911. Initially, the idea behind NI was to provide a government safety-net (of money) for employees who fell on hard times – those who had lost their jobs or needed money for medical treatments. Workers donated to this system from their wages and anyone who was in need could claim from the money collected.

Today, NI has changed slightly, but remains similar. Essentially, if you have a job, you pay national insurance contributions (NIC). National insurance is not a tax per se’, but it is virtually identical to income tax in that, depending on how much you earn, a percentage of money is taken from your salary. The downside to NI not being a tax is that governments can say they haven’t increased income tax even though they’ve put up national insurance.

Why Do You Pay National Insurance?

You pay NI so that you can qualify for certain benefits. One benefit that NICs help to pay for would be state pension – the regular payment you receive from the UK government to support you in your old age, once you reach state pension age. You stop paying NI once you reach state pension age (even if you decide to carry on working). You can work out your state pension age on the GOV.UK website.

National Insurance Classes

National insurance falls into several classes. The class you pay depends on your employment status, your salary and whether there are any gaps in your NI record. Here are the classes and who pays them:

  • Class 1 – employees earning over £157 a week who are under state pension age – contributions are automatically deducted by your employer
  • Class 1A or 1B – paid by employers on their employee’s expenses or benefits
  • Class 2 – self-employed people who earn £6,025 a year or over
  • Class 3 – voluntary contributions – you can pay these to fill or avoid gaps in your national insurance record
  • Class 4 – self-employed people who earn a profit of over £8,164 a year

What is National Insurance Used For?

NICs count towards the following benefits:

  • Basic, additional, and new state pensions
  • Contribution-based jobseeker’s allowance
  • Contribution-based employment and support allowance
  • Maternity allowance
  • Widowed parent’s allowance
  • Bereavement allowance
  • Bereavement support payment
  • Bereavement payment

Who is Eligible?

You need a national insurance number before you can start paying NICs. You pay NI if you are 16 or over, below pension age and either:

  • An employee earning above £157 a week
  • Self-employed and making a profit of £6,025 or more a year

How Much Do you Pay?

The amount of NI you pay depends on how much you earn and your employment status. Here’s an example taken from the GOV.UK website:

If you’re employed – You pay Class 1 national insurance contributions. The rates for most people for the 2017 to 2018 tax year are:

  • 12% – if you earn £157 – £866 a week
  • 2% – if you earn over £866 a week

If you’ve got an eye for numbers, and want to have your own accounting firm one day, you will have to think about national insurance contributions, as well as tax.

The Association of Accounting Technicians (AAT)’s qualifications are a popular choice for those wishing to carve a career in accounting. AAT’s Advanced Diploma in Accounting – Level 3 covers indirect tax and you can learn about business and personal tax on their Level 4 course.

Want to get your accounting career off to a flying start, contact Aspiring Accountants today. 

For more in-depth information on national insurance head to the GOV.UK website.


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