Understanding National Insurance

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National Insurance is collected by HMRC to provide state support for the sick, the unemployed and the retired. One of the main reasons you may want to ensure that you have made enough National Insurance contributions is to ensure that you qualify for, or to maximise your State Pension. It is possible to get National Insurance credits so that if you don’t make the payments yourself, you are still able to earn qualifying years towards your pension, for example if you are claiming child benefit but not working.

There are different types of National Insurance depending on your situation. I will briefly explain them below.

Employees

If you are an employee, you will pay Class 1 National Insurance on all earnings above a threshold.

Whilst there are some categories of employees who will pay lower rates (or none at all if you are over the state pension age), for the majority of us the rate is 12%, which applies to earnings over £1,048 per month, dropping to 2% for anything over £4,189 per month.

Employers

Employers also need to pay Class 1 National Insurance, although it operates slightly different to that for employees. This is classed as Secondary Class 1 compared to Primary Class 1 for employees. For most individuals that a company employs, with the noteable exception of apprentices, employers will pay 13.8% on salaries that exceed £758 per month. Unlike with employees, there is no point at which the rate drops off.

Employers may be entitled to claim the Employment Allowance which can allow them to reduce their National Insurance bill by up to £5,000, assuming certain conditions are met.

An employer may also have to pay Class 1A National Insurance. This is payable on any benefits you give to your employees, such as healthcare, company cards or similar.

They may also pay Class 1B National Insurance which is related to paying tax on behalf of employees when they have benefits, although this is likely not of much interest to the majority of those reading this.

Self-employed individuals

If you are self-employed, you will pay Class 2 and Class 4 National Insurance. These work in different ways and whilst Class 4 will calculate automatically when you file your annual tax return, you will specifically need to tell HMRC that you are self-employed for Class 2 National Insurance to be calculated correctly.

We have had clients who thought that they didn’t need to tell HMRC that they were self-employed as they were already completing tax returns, for example due to renting a property, however because they had not filled out the form, Class 2 National Insurance was not being included correctly.

Class 2 National Insurance is a weekly charge of £3.15 that applies if your profits exceed the threshold, which is currently £3.15 per week.

Class 4 National Insurance is charged at around 9% on profits over the threshold, but similar to Class 1 National Insurance, the rate drops to around 2% on earnings over £50,270. These rates are slightly random amounts for the 2022/23 financial year due to a change in government policy mid-year.

Voluntary Contributions

You may wish to make voluntary National Insurance contributions to make up for not having enough qualifying years to get the State Pension that you had hoped for. This is called Class 3 National Insurance. It is always worth taking advice before making voluntary contributions. The Future Pension centre are able to offer advice, or you can contact your own pension advisor. Pensions advice is a regulated service, so we at Anderson Accounts are unable to tell you much more than is in this article and the one on the New State Pension.

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