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

National Insurance contributions are a tax on earnings and self-employed profits paid by employees, employers and the self-employed. They can help to build your entitlement to certain benefits depending whether you are employed or self-employed, such as the State Pension and Maternity Allowance. Some social security benefits will be dependant on payment of sufficient National Insurance Contributions.

Several factors can determine the level and type of national insurance contribution is payable including:

• employment status
• age
• level of earnings
• residence status.

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.

It applies to each pay period. Depending on how often you get paid, it could be weekly, monthly, or a different time period.

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.

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.

How much you’ll pay in National Insurance depends on what kind of National Insurance you’re paying. From 6 January 2024, the National Insurance rate will be cut by 2%.

There are four main classes of National Insurance:

• Class 1 is paid by employees and employers
• Class 2 is paid if you’re self-employed. From April 2024, if you’re self-employed, you will no longer need to pay Class 2 National Insurance contributions.
• Class 3 is a voluntary contribution
• Class 4  is paid if you’re self-employed and have profits over a certain amount 

If you’re an employee you start paying National Insurance when you earn more than £242 a week (2023/24).

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

• 12% of your weekly earnings between £242 and £967 (2023/24)
• 2% of your weekly earnings above £967.

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

• nothing on the first £242
• 12% (£87) on the next £725
• 2% (£0.67) on the next £33.

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

If you’re self-employed, you might be able to pay Class 2 contributions instead. Class 2 National Insurance contributions are set at a flat-rate weekly contributions of £3.45 a week in 2023-24.

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 £6,725 (the Small Profits Threshold) or more in 2022-23 (£6,725 in 2023-24).

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.

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 at least 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 enough qualifying years, you might want to pay Class 3 voluntary contributions to boost your pension entitlement.

For 2023-24, Class 3 contributions are payable at a weekly rate of £17.45. This is the maximum rate payable each week. Sometimes they must be paid at the rate for the year in which they are paid instead of the rate for the year for which they are paid. The contributions are collected by HRMC by quarterly demand or monthly direct debit.

You might not always be able to pay Class 3 contributions 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
• you will benefit from making any voluntary National Insurance contributions. 

If you’re self-employed and make profits of £11,908 or more in 2022-23 (£12,570 in 2023-24), you’ll pay Class 4 National Insurance contributions. From April 2024, the rate of Class 4 National Insurance contributions will be cut by 1%.  

If you’re over this threshold, you’ll pay 9% on profits between £11,908 and £50,270 in 2022-23 (£12,570 and £50,270 in 2023-24).