How does National Insurance work and should you be paying it?

National Insurance contributions are a tax on earnings paid by employees and employers. They help to build your entitlement to certain benefits, such as the State Pension and Maternity Allowance.

Unlike Income Tax, National Insurance isn’t an annual tax.

It applies to your pay each pay period – it could be monthly, weekly or a different period depending on your employer’s arrangements. This means if you earn extra in one month, you’ll pay extra National Insurance. But you won’t be able to claim the extra back, even if your pay is lower during the other months of the tax year.

Do you get paid through a Pay As You Earn (PAYE) system? Then National Insurance contributions will be automatically deducted from your salary, so you won’t need to do anything.

Are you self-employed? Then your National Insurance contributions will be calculated based on your Self Assessment tax return. They’ll be paid at the same time as Income Tax.

You start paying National Insurance when you earn more than £183 a week (2020/21).

The National Insurance rate you pay depends on how much you earn, and is made up of:

• 12% of your weekly earnings between £183 and £962 (2020/21)
• 2% of your weekly earnings above £962.

For example, if you earn £1,000 a week, you pay:

• nothing on the first £183
• 12% (£93.48) on the next £779
• 2% (£0.76) on the next £38.

The rate of National Insurance you pay might be lower if you opted into the Married Women’s Reduced Rate before April 1977. Find out more on the GOV.UK site

As an employee, your National Insurance contributions stop when you reach State Pension age.

Class 3 voluntary National Insurance contributions are designed to fill in any gaps in your National Insurance record. The aim is to get you a higher State Pension.

To receive the full new State Pension, you’ll need to have 35 qualifying years of National Insurance contributions. It’s payable to people who have reached their State Pension age on or after 6 April 2016.

Anyone with less than this will receive a reduced State Pension. To receive the new State Pension you need to have a minimum of ten qualifying years.

If you don’t have 35 qualifying years, you might want to pay Class 3 voluntary contributions to boost your pension entitlement.

In 2020/21, Class 3 contributions are payable at a weekly rate of £15.30. This is the maximum you can pay each week.

You might not always be able to pay Class 3 contributions (or Class 2) for a tax year.

That’s why it’s important to find out whether:

• you can make payments towards any gaps
• how much you’ll need to pay
• what benefit (if any) you would get by making a voluntary payment before deciding whether to pay any voluntary National Insurance contributions.

If you’re self-employed, or have been working abroad, you might be able to pay voluntary Class 2 contributions instead.

Class 2 National Insurance contributions are flat-rate weekly contributions of £3.05 a week in 2020/21.

You’ll need to pay them for every week or partial week of self-employment in a tax year. This is if your profits for the entire tax year are £9,500 (the Small Profits Threshold) or more in 2020/21.

Paying Class 2 contributions is voluntary for self-employed people with profits below the Small Profits Threshold. Paying Class 2 National Insurance contributions, even if your profits are lower, can still help you build contributory entitlements to benefits.

This can be a specialist area but if you use an accountant to do your books or help with your tax return they will be able to give you some guidance on this.