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Taxes – they can all seem like a bit of a drag, can’t they? However, they are essential to ensuring that economies can operate and that citizens benefit from a range of essential services, including healthcare, education and security.
National Insurance is no exception and is a fundamental component of the welfare state system in the UK. Ultimately, it acts as a form of social security or ‘insurance’, with contributions entitling you to certain state benefits as well as a State Pension.
Here, we explain more about National Insurance, what it is and how it works.
If you are 16 years old or over, then - for the current tax year 2021/2022 - you will pay mandatory National Insurance when you are either an employee earning more than £184 per week or you are self-employed and making a profit of £6,515 or more per year.
If you earn between £120 and £184 per week, your contributions are treated as having been paid to protect your National Insurance contributions record.
You will need a National Insurance number before you can start paying National Insurance contributions. This is made up of letters and numbers and will never change throughout your entire life.
National Insurance numbers are usually issued to UK citizens after they turn 16 years old. Alternatively, you can apply for a National Insurance number if you do not have one. If you have lost your National Insurance number, you can visit HMRC’s website for further information about how to recover it.
Depending on your employment status and how much you earn, there are different types of National Insurance classes that will be applied. These are:
Class 1 – employees earning more than £184 per week and under State Pension age. These contributions will automatically be deducted by your employer
Class 1A or 1B – employers pay these directly on their employees’ expenses or benefits
Class 2 –self-employed people earning profits of £6,515 or more per year. If you are earning less than this, you can choose to pay voluntary contributions to fill or avoid gaps in your National Insurance record
Class 3 – voluntary contributions that you can pay to fill or avoid gaps in your National Insurance record
Class 4 – self-employed people earning profits of £9,569 or more per year
If you are employed, you will stop paying Class 1 National Insurance as soon as you reach State Pension age.
If you’re self-employed you will stop paying Class 2 National Insurance when you reach State Pension age and Class 4 National Insurance from 6 April after you reach State Pension age.
The amount you pay will depend on your employment status and how much you earn and which National Insurance class you fall into.
National Insurance will increase by 1.25% from April 2022 for Class 1, Class 4 and secondary Class 1, 1A and 1B. This increase won’t be applied if you are over the State Pension age.
The current rates for National Insurance can be viewed on HMRC’s website here.
If you are employed, your employer will deduct your National Insurance from your wages before you get paid. This will be detailed on your payslip.
If you are a director of a limited company, you may also be your own employee and pay Class 1 National Insurance through your PAYE payroll.
If you are self-employed and paying either Class 2 or Class 4 National Insurance contributions, you can pay these through your Self-Assessment.
There are different rules for company directors, landlords running a property business and share fisherman. Further information about these can be found on HMRC’s website here.
If there are gaps in your National Insurance record, your benefits could be affected. You may be entitled to credits if you cannot pay towards contributions. For example, if you can’t work because of illness or you are caring for someone.
You can also top up your National Insurance by making voluntary contributions.
Whether you are an employer managing payroll or a self-employed individual, a qualified bookkeeper and payroll specialist, like AMR Bookkeeping Solutions, will be able to help you manage your National Insurance contributions quickly and efficiently. You can find out more about how we can assist you with your payroll and bookkeeping requirements on the services section of our website.
For further information or advice about National Insurance or the payroll process, please get in touch with our friendly team on 01892 559480 or use our online enquiry form.