National Insurance can be simply seen as the system of contributions which are paid by workers and employers towards the cost of some state benefits. It was originally a system against illness and unemployment, but has since expanded to include pensions. It was introduced in the United Kingdom as part of the National Insurance Act 1911, and has been amended several times over the years (such as in 1948 when the NHS was launched).
Put simply, you pay a certain amount of your profit towards these charges. For employed individuals, your employer usually calculates these and deducts them automatically.
National Insurance is different to Income Tax and therefore both may be charged depending on your business profits.
Types of National Insurance
There are a number of different types of national insurance. Self Employed individuals will only pay Class 2 and Class 4 from this list.
If you’re Employed, you pay Class 1
If you’re Self Employed and Employed your employer will deduct Class 1 from your salary, and you may need to pay Class 2 and Class 4 for your Self Employed work.
National Insurance Class 1
- Class 1: This is paid by employees (not self employed) who are earning more than £184 per week, and who are under the state pension age.
- Class 1A or 1B: These are paid by Employers directly to HMRC.
National Insurance Class 2
- Self employed people – if you earn over a specific amount, however if you earn less you can still pay voluntary contributions (mentioned at bottom of this page).
National Insurance Class 3
- These are voluntary contributions – you can pay these to fill gaps in your National Insurance Record, or if you’d like to contribute more.
National Insurance Class 4
- Self-employed people who have profits over a specific amount
What are the National Insurance rates?
From the above information, Self Employed individuals pay Class 2 and (in some cases) Class 4 contributions. These are calculated through the below amounts:
- 22/23 Financial Year
- 23/24 Financial Year
- 21/22 Financial Year
Class 2:
– £3.15 a week (when profits are over £6,725 a year)
Class 4:
– 9% on profits between £11,909 and £50,270
– 2% on profits over £50,270
Class 2:
– £3.45 a week (when profits are over £6,725 a year)
Class 4:
– 9% on profits between £12,570 and £50,270
– 2% on profits over £50,270
Class 2:
– £3.05 a week (when profits are over £9,568 a year)
Class 4:
– 9% on profits between £9,568 and £50,270
– 2% on profits over £50,270
The amounts are automatically calculated by HMRC when you complete your tax return. Most people will pay these amounts through the Self Assessment system.
Class 4 works similar to income tax-free allowances whereby using the figures above, the first £9,568 of profits are not subject to national insurance, whereas anything above this would be taxable.
Example: Anne has profits of £18,000 at the end of the 22/23 financial year. The first £11,909 is not subject to National Insurance Class 4, but anything beyond this would be taxable as below:
£18,000 – £11,909 = £6,091 subject to NI Class 4
9% of £6,091 is £592.65.
Class 2 would still also apply at approximately £163.80 per year (due to rounding and leap periods counted), therefore total National Insurance would be £6,091 + £163.80 = £6254.80 NI Total.
Voluntary contributions
It is possible to pay more than the contributions listed above. To some people, this may seem very unusual – why would you want to pay more than you should(?!) however there are benefits to doing so.
- It can increase the bereavement benefits for your spouse or civil partner
- You can increase or top-up your state pension
- If you don’t qualify for the state pension and need to top-up years.
HMRC have a full guide on voluntary contributions and the relevant forms you’ll need to complete.