In addition to income tax, individuals have another amount to pay on earnings known as National Insurance Contributions (NICs). NICs are similar to tax except that paying them allow you to qualify for certain benefits.
Which benefits are linked to NICs?
NICs mainly cover the state pension, as well as additional and new state pensions. They are also used to supply contribution based allowances such as Jobseekers’ Allowance and Employment & Support Allowance. Finally, NICs can be used to determine eligibility for Maternity Allowance and Bereavement benefits.
How do I pay NICs?
There are four types (or classes) of NICs which are determined and paid in different ways.
Class 1 NICs are linked to employment income; you pay a rate of 12% on earnings above £155 per week, up to £815. Earnings above £815 per week have a 2% rate of NICs applied to them. Class 1 NICs are deducted from your pay in the same fashion as income tax, meaning you do not usually need to actively pay these NICs. Employers pay Class 1 NICs on earnings above £156 at a rate of 13.8%. There is no reduced higher rate for employer NICs.
Class 2 NICs are linked to self-employment income such as sole traders. If you earn more than £5,965 per year you will be required to pay an amount of £2.80 per week.
Beginning from the 2015/16 tax year, Class 2 NICs will be collected along with income tax. This means when you complete your tax return HMRC will be able to see if you are eligible to pay Class 2 NICs based on the profit calculated. If you are under the limit, there will be an option to voluntarily pay Class 2 NICs so you can still contribute towards your state benefits.
Direct Debit payments and bills for Class 2 NICs will cease for July 2015 automatically meaning you do not need to do anything.
Class 3 NICs are known as voluntary contributions. You can choose to pay Class 3 NICs at a rate of £14.10 per week if you are not currently paying anything towards your NICs.
Class 4 NICs are linked to self-employment like Class 2 NICs, but work more like Class 1 NICs. They have a rate of 9% for profits greater than £8,060 and a rate of 2% on profits greater than £42,385. Class 4 NICs are paid alongside your self-assessment income tax.
How does the government know how much I’ve paid?
Your NICs are assigned to your National Insurance Number which will be used by your employer or on your tax return to ensure that any NICs you pay will be applied to determine which benefits and how much benefit you are eligible for.
Please note that while the above figures and rates should be accurate at the time this blog was published, they are subject to change. Always make sure to double check the rates and allowances from official sources such as those listed on our useful links menu.
If you require any advice or more information on the above, please do not hesitate to contact us.
