I reckon National Insurance is something we all have heard about, but know little about. Do many of us know why we pay it, or where the money goes? Until researching this, i am sad to say i did not. Here we delve deeper and see what is involved. This is National Insurance explained.
This contribution differs from income tax, as it is not an annual tax. When you get paid, the insurance is taken off your earnings. If you are self-employed, when you submit your annual tax return (or perhaps twice a year), the figure you need to be pay will be calculated for you. In a way it is similar to income tax therefore as the more you earn, the more you pay.
Employed people start making contributions once they earn above £183 a week (2020-21). The rate you will have to pay depends on how much you earn:
Your contributions will be taken off along with Income Tax before your employer pays your wages.
Employee’s National Insurance contributions finish when you reach State Pension age.
Both an employee and employer make contributions based on earnings. These earnings include holiday, sick and maternity pay. Some share schemes will not attract contributions, so the list is not exhaustive.
Unlike income tax, these payments are not just about helping to build roads or fund the NHS. They are effectively an insurance policy for you. They do pay for services such as the NHS, but also are vital towards contributing to the benefits and pension system. As you will see, by contributing for a certain period, you cover yourself after you stop working.
The system and various governments designed Class 3 voluntary National Insurance contributions to eradicate gaps in your National Insurance record. This is in order for you and millions of others to get a higher State Pension.
To receive the full new State Pension, which is payable to people who have reached their State Pension age on or after 6 April 2016, it is necessary to have made 35 years of qualifying payments of National Insurance contributions. Anyone with less than this will receive a reduced State Pension. To receive the new State Pension you must have a minimum of ten qualifying years.
If you don’t have 35 qualifying years, you can pay in to boost your payments and reach the magical figure. In 2020-21, Class 3 contributions are payable at a weekly rate of £15.30. This is the maximum you can pay each week.
If you’re self-employed or have been working abroad, you may be able to pay voluntary Class 2 contributions instead.
Class 2 NICs are currently flat-rate weekly contributions of £3.05 per week in 2020-21. You’ll need to pay them for every week or partial week of self-employment in a tax year if your profits for the entire tax year are £9,500 (the Small Profits Threshold) or more in 2020-21.
Payment of Class 2 contributions is voluntary for self-employed people with profits below the Small Profits Threshold. Paying Class 2 NICs even if your profits are lower can still help you build contributory entitlements to benefits.
This can be a specialist area and it’s best to take advice based on your individual personal circumstances.