National Insurance (NI) is a tax on earnings paid by employees and the self-employed, who pay it on their profits. Unlike income tax, NI contributions are not charged on income from other sources such as savings, pensions, rented out property or any benefits.
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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The Labour Party pledged as part of its election manifesto, not to “increase taxes on working people”, specifying that National Insurance, among others, would not rise.
Yet millions of people pay NI which takes a chunk of their earnings each year. For the 2024/25 tax year the OBR forecasts that NI contributions will have raised £168.1 billion for the government – equivalent to around a sixth of all tax revenue.
It’s important to understand how the National Insurance system works and what the money is used for. Here’s what you need to know.
What is National Insurance?
National Insurance (NI) is a tax on earnings. Workers start paying Class 1 NI from the age of 16 on earnings of over £242 per week from one job or on profits of over £12,570 a year for the self-employed.
The NI rate for Class 1 contributions for the 2024/2025 tax year is 8% on weekly earnings 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.
For the majority of employees, it is paid via the pay-as-you-earn (PAYE) system which means it’s automatically deducted from your earnings, and you don’t need to make any separate payments.
For the new tax year 2025/26 the rate of NI for individuals remains unchanged.
Do I pay National Insurance if I’m self-employed?
The rates of NI are different for self-employed people, and the way it is paid differs too.
If you’re self-employed, you’ll need to know about Class 2 and 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 as these contributions were abolished in April 2024.
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. You might choose to pay Class 2 if you want to fill any gaps in your NI record, if you work or live abroad, or if you don’t pay through self-assessment.
For the self-employed, NI contributions will be on your self-assessment tax return and are due at the same time as income tax.
While NI stops for employees once the state pension age is reached, if you are self-employed, you stop paying class 4 NI from the start of the tax year after the one in which you reach state pension age.
For the new tax year 2025/26 the rate of NI for the self-employed remains unchanged.
What does National Insurance go towards?
NI contributions go towards funding a long list of benefits. These include the state pension, statutory sick pay, and the maternity allowance, jobseekers allowance and bereavement support payments. A small amount is also directed to the NHS.
What are voluntary National Insurance contributions?
If you want to boost your state pension, you can make extra NI contributions by purchasing NI credits.
Also known as Class 3 NI contributions, these help you fill in gaps in your NI record from a time when you were perhaps working but with low earnings, not working and not claiming benefits, or living or working abroad.
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 backdate gaps in your National Insurance to cover a longer period of time was extended to April 2025.
National Insurance credits
Before making voluntary National Insurance contributions, it's important to check if you're eligible for credits. These can be automatic but sometime they'll need to be applied for.
National Insurance and the High Income Child Benefit Tax Charge (HICBC)
Child Benefit aims to provide extra financial support for parents and guardians and gives access to National Insurance credits.
For the current 2024/25 tax year, if you are eligible you will receive £25.60 a week for the eldest or only child and £16.95 a week for any other children.
In April 2025, Child Benefit rates will rise to £26.05 a week for the first or only child and then £17.25 a week for other children.
A rule called the High Income Child Benefit Tax Charge (HICBC) means that for those who earn over a certain threshold, the benefit is reduced. The good news is that the credit for National Insurance purposes remains.
Laura Suter, director of personal finance at AJ Bell, a pensions and investment provider, says: “One of the perks of claiming Child Benefit is that you get an NI credit at the same time.
"This is great for parents who are out of work or not earning enough to meet the NI threshold, as they get a credit for that year that counts towards their state pension entitlement.
“If you’ve breached the earnings limit for Child Benefit and are subject to the High Income Child Benefit Tax Charge, you will still get the credit for NI purposes, even if you have to repay some (or all) of the actual Child Benefit amount.”
As incomes have increased during a period of high inflation and wage growth, more people are expected to hit the high income charge for Child Benefit.
Suter adds: “The move to increase the upper limit from £60,000 up to £80,000 will help to mitigate some of this, but it still means that a couple with one higher earner won’t be eligible to claim Child Benefit. However, they can still claim the NI credit without claiming the actual money.
“The Government also has plans to allow parents to claim for missing NI credits from previous years. Many parents didn’t claim Child Benefit as they exceeded the income cap, but missed out on the National Insurance credit, meaning they could end up with a lower state pension as a result.”
The rules allow eligible parents to claim Child Benefit up to a child turning 12, meaning that a parent of one child with unclaimed credits could have a 12-year gap on their NI record, equating to a far lower state pension when they hit retirement age.
If parents have multiple children, the gap could be even longer, if they don’t work for that entire period.
“We’re still awaiting details of how parents can claim and how many years they can claim for, with the scheme expected to be up and running by April 2026,” Suter says.
What is employers' National Insurance?
National Insurance is paid by employers as well as individuals. In fact, employers pay the lion’s share of NI – an estimated 63% in 2023–24 – and it’s soon to rise.
In the Autumn Budget, the Chancellor Rachel Reeves announced an increase to employers’ NI contributions from 13.8% to 15% from April 2025.
The threshold at which businesses begin paying the tax on an employee’s salary will also drop from £9,100 per year to £5,000 which means they will pay higher bills on both counts.
According to calculations by Quilter, under the planned increases, a business employing someone on an annual salary of £30,000 will pay £865.80 more each year to keep them on the payroll.
While this doesn’t directly impact employees, the increased NI bills for employers could mean fewer pay rises and smaller bonuses for staff. It could even trigger redundancies for some businesses.
It could, however, mean more opportunity for salary sacrifice schemes where employees voluntarily reduce their taxable income in exchange for benefits like additional pension contributions or even cars or bicycles.
-
Why Chinese stocks are so far out of favourThere’s little appetite for Chinese stocks despite low valuations.
-
The 62 UK areas where you could be priced out of using your Lifetime ISASaving for your first home in Croydon, Ealing, Brent or any one of these other locations? You could be at risk of being priced out of using your Lifetime ISA
