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What Does National Insurance Pay For?

What does National Insurance pay for
What does National Insurance pay for?

If you earn money in the UK, you probably pay National Insurance. You might wonder why this is and where exactly your National Insurance contributions go. In this article, we take a closer look at what National Insurance is, when you pay it, and how much you need to pay. So, what does National Insurance pay for?

 

What Is National Insurance?

National insurance is a tax on earnings and self-employed profits in the UK. It’s compulsory (if you’re earning over a certain amount) and you pay it on top of any income tax you owe. The National Insurance scheme was set up in 1911 to provide a safety net for those unable to work. Initially administrated by the government with assistance from approved voluntary societies, it was later nationalised in 1945.

To pay National Insurance, you need a National Insurance Number. This is a life-long, unique identification number that keeps track of your National Insurance payments. If you’re a UK citizen, you automatically receive a National Insurance number when you turn 16. If you’re a non-citizen, you need to apply for one online.

 

What Does National Insurance Pay for?

National insurance pays for various state benefits including:

  • State Pension
  • Employment and Support Allowance
  • Maternity leave
  • Sick leave
  • Bereavement benefits
  • Jobseeker’s Allowance

It also helps fund the National Health Service (NHS), the UK’s government-funded healthcare system. It’s essentially a form of social security or government-provided safety net. By making National Insurance contributions, you qualify to receive certain benefits if/when you need them.

The National Insurance Fund

Your National Insurance contributions go into the National Insurance Fund. The fund is meant to be ring-fenced, meaning your contributions can only be used towards these public benefits. But the government can borrow money from the fund to pay for other public expenditures.

What Is National Insurance Spent On?

In 2019, National Insurance was spent on the following:

  • £26.5 billion was allocated to the NHS
  • £98.7 billion went towards State Pensions
  • £4.52 billion went into employment and support allowances

After income tax, National Insurance contributions are the second biggest source of government revenue. In the 2019-2020 tax year, the government collected £145 billion in National Insurance contributions.

 

Who Pays National Insurance?

Everyone working in the UK – employers, employees, and the self-employed – pays National Insurance. You start paying National Insurance as soon as you turn 16 and earn over a certain amount of money. That amount for employees is currently £184 a week and £6,515 per year for the self-employed.

To be eligible to access state benefits, you must have paid National Insurance for a certain number of qualifying years. For example, to be able to claim a State Pension, you must have paid National Insurance for a minimum of 10 years. If you’ve paid for 35 years, you’ll receive the full pension. Otherwise, the government will adjust your pension according to the number of years you’ve contributed.

Can I Opt Out of National Insurance?

You cannot opt out of National Insurance if you’re 16 or older and are employed, and earning above the thresholds for each respective class of National Insurance contributions for which you are eligible to pay.

National Insurance Credits

You might be eligible for National Insurance credits that count towards your qualifying years, even when you’re not making National Insurance contributions, e.g. while you’re on maternity leave. You can keep track of your National Insurance contributions and credits here.

If you don’t pay National Insurance, HMRC can fine you, and those fines, along with daily interest and late payment penalties, can add up over time. So, it’s best to ensure you’re all set up with a National Insurance number and are making the necessary National Insurance contributions to avoid any unwanted penalties.

 

How Much National Insurance Do You Pay?

There are different rates of National Insurance contributions, depending on your employment status and income level. We’ve set out the different categories of National Insurances rates below. Keep in mind, these are the rates for the 2021-2022 tax year, and HMRC reviews them annually.

Class 1

Employees that earn over £184 per week and are under the State Pension age pay Class 1 National Insurance contributions. On monthly earnings between £797 to £4,189, you pay 12%, and then 2% on any earnings over £4,189.

Employers deduct the necessary amount from the employee’s salary and also pay an employer’s contribution (up to 13.8%) to HMRC on behalf of the employee.

Class 1A or 1B

Employers pay Class 1A or 1B National Insurance contributions if they provide expenses or benefits to their employees or directors, such as a company car or travel expenses.

Class 2

Self-employed workers (that’s you, freelancers!) earning over £6,515 a year pay Class 2 National Insurance contributions. Class 2 contributions are £3.05 per week.

Class 3

This kind of National Insurance contribution is voluntary. Someone might make a voluntary payment to avoid a gap in their National Insurance record and ensure they can access benefits such as the full State Pension. If you’re a freelancer, or an employee, you usually don’t need to worry about Class 3 National Insurance contributions.

Class 4

Self-employed people earning more than £9,569 a year pay Class 4 National Insurance contributions. On annual profits between £9,569-£50,270, you pay 9%, and then you pay 2% on any profits over £50,270.

 

When Do I Pay National Insurance?

You start paying National Insurance when you turn 16 and:

  • Earn more than £184 a week if you’re an employee
  • Earn £6,515 per year if you’re self-employed

If you’re an employee, your National Insurance contributions are calculated and paid to HMRC each pay cycle. This is the “pay as you earn” or PAYE system. Your payslip reflects your National Insurance contributions, as well as those your employer makes on your behalf.

If you’re self-employed, your National Insurance contributions are calculated at the same time as your income tax when you file your Self Assessment tax return. In the first year of your business, you must pay any tax (including National Insurance) to HMRC by the 31st of January the following year. At the same time, you also need to make a payment on account that includes National Insurance for the following year.

 

When Do You Stop Paying National Insurance?

If you’re an employee, you stop paying National Insurance contributions when you reach the State Pension age, even if you continue working. If you’re self-employed and paying Class 4 contributions, you need to continue to make National Insurance contributions until the end of the tax year in which you reach the State Pension age. The State Pension age is currently 65 or 66, depending on your date of birth. FYI – by 2046, the State Pension age will have gradually increased to 68!

Hopefully you can now see what your National Insurance contributions pay for. Particularly as a self-employed freelancer, it’s important to understand Class 2 and Class 4 National Insurance contributions. By keeping on top of your contributions now, you avoid incurring any penalties or missing out on any state benefits you might need in the future.

If you want to learn more about paying tax as a freelancer, check out this post here. If you want more articles like this, head over to the blog!

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