What are national insurance contributions?

Most of us pay National Insurance contributions but few of us really understand them. Help is at hand with our quick guide to demystifying this esoteric pseudo-tax.

National Insurance contributions (NICs) are hardly the most exciting subject. But all pay as you earn (PAYE) employees aged between 16 and state retirement age must pay them if they earn more than the primary threshold (£184 a week). Contributions are then paid at the full rate on all earnings up to the "upper earnings limit" (£967 a week). Sick and holiday pay is included. 

National Insurance contributions are effectively an extra tax. While how much you have paid over a working life has some bearing on your entitlement to a state pension, your payments are in no way actually set aside for your pension. Instead, they just pop into the general pool of money being managed by the government. And you can't opt out.

So how much do you pay? There are various classes of National Insurance contributions. Employees pay primary Class 1 contributions, while the self-employed are liable for Class 2 and 4 contributions. 

The basic NI rate for employees paying primary Class 1 contributions is 12% for earnings between the primary threshold and upper earnings limit, and 2% for earnings above. 

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