National Insurance contributions (NICs) have been in the news a lot over the past year, with chancellor Jeremy Hunt slashing the rates several times.
Hunt announced a National Insurance cut in his Spring Budget in March - after already lowering the rate in last year’s Autumn Statement.
The Conservatives say they will cut National Insurance (NI) by another 2p by April 2027, if they win the next election. In fact, the party says they have a “long-term ambition” to scrap National Insurance to stop the “unfair” practice of taxing people twice on their income.
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The Green Party, Plaid Cymru and the SNP also included National Insurance in their election manifestos, potentially hiking the tax for higher earners.
So, with National Insurance making the headlines, it’s a good time to get better-acquainted with the tax.
All pay as you earn (PAYE) employees aged between 16 and state retirement age must pay NICs if they earn over a certain amount.
Self-employed workers pay a different type of National Insurance, depending on their earnings.
With millions of us paying National Insurance, it’s important to understand how the system works and what the money is used for.
What is National Insurance?
National Insurance is a tax on earnings. Workers start paying Class 1 NI when they turn 16 and earn over £242 per week from one job, or make over £12,570 a year if they are self-employed.
The National Insurance rate for Class 1 contributions for the 2024/2025 fiscal year is 8% on anything between £242 and £967. The rate for earnings over that threshold is 2%.
The amount you pay is calculated based on how much you get paid, so your NI contributions could change monthly.
Do I pay National Insurance if I’m self-employed?
If you’re self-employed, you’ll pay Class 2 or Class 4 contributions.
If you make between £12,570 and £50,270, you’ll pay Class 4 NI contributions, which are 6% of your profits. You’ll also pay 2% on anything over £50,270.
If you’re earning between £6,725 to £12,569, you are counted as making Class 2 contributions to protect your NI record, but you don’t need to pay anything.
If your annual trading profits are below £6,725, you can opt to make voluntary Class 2 contributions if you want to, at £3.45 per week.
What does National Insurance go towards?
National Insurance contributions go towards funding the state pension, statutory sick pay, and maternity leave, among other state benefits.
Voluntary National Insurance contributions
If you want to boost your state pension, you can make extra National Insurance contributions by purchasing NI credits.
Also known as class 3 National Insurance contributions, these help you fill in gaps in your National Insurance record.
You need 35 years of NI contributions to qualify for the full new state pension.
If you don’t think you’ll have this amount when you reach state pension age, you can check your state pension forecast through the government website. This will help you figure out if you should buy more NI credits and how many you’ll need.
Normally, you can only purchase NI credits from six years ago. But the deadline to purchase them to cover a longer period of time was extended to April 2025.
