Income tax grabs the headlines, but your National Insurance bill can be horrendous too. Rachel Lacey tells you how much you’re paying and how to make sure you get back what you’re owed.
To get the full state pension, currently £203.85 a week, you’ll need to have made 35 years of National Insurance Contributions (NICs).
But what is National Insurance, how do you pay it and what can you do if retirement is getting ever closer and you’ve not paid enough?
Get the lowdown on everything you need to know about National Insurance with our guide.
What is National Insurance?
National Insurance is a compulsory tax on your earnings or self-employed profits that is paid in addition to income tax.
But rather than going into a generic Treasury ‘pot’, National Insurance contributions are used to build up your entitlement to a specific range of welfare benefits including contributions-based job seekers allowance, maternity allowance and bereavement support, in addition to the state pension.
The minimum age for paying National Insurance is 16 – but while everyone still gets a National Insurance number in time for this milestone birthday, those iconic blue and red striped plastic cards that used to mark teens’ first forays into adulthood were scrapped in 2010.
Once you reach State Pension Age you stop paying National Insurance, even if you are still working.
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How much National Insurance do I pay?
How much National Insurance you pay depends on your employment status and, like income tax, the amount you pay is based on your earnings above a certain threshold.
National Insurance contributions if you’re employed
If you’re employed you’ll need to pay Class 1 contributions.
In the 2023-24 tax year these are charged at 12% on earnings above £12,570 and 2% on earnings in excess of £50,270.
Your National Insurance will automatically be deducted from your salary, payments for overtime, bonuses, commission, as well as sick and maternity pay.
In addition, your employer will make National Insurance payments on your behalf too.
National Insurance contributions if you’re self-employed
Self-employed people pay Class 2 and Class 4 National Insurance.
Class 2 contributions cost £3.45 a week, once you have profits north of £12,570. You might hear this referred to as the lower profits limit.
You might also come across the small profits threshold – currently £6,725. If you don’t earn more than this, you can choose to pay voluntary Class 2 contributions (to boost your entitlement to certain benefits). However, if your profits are between the small profits threshold and the lower profits limit you do not need to pay Class 2 rates and your ability to claim benefits such as the maternity allowance won’t be affected.
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Class 4 contributions are also paid on profits over £12,570 and are charged at a rate of 9%, but drop to 2% on profits over £50,270.
As you do not have an employer to deduct National Insurance contributions from your profits, payments need to be made alongside income tax in your self-assessment tax return.
What happens if I have taken time out of work?
Lots of people will spend many years out of the workplace, but it doesn’t necessarily follow that if you haven’t been paying National Insurance, you won’t qualify for the full state pension.
If you are unemployed for a while, too ill to work or have taken time out to raise a family or care for someone, you may be entitled to National Insurance credits. This is effectively a National Insurance payment on your behalf, if you are claiming certain benefits.
These include universal credit, child benefit, statutory maternity and paternity pay, job seekers allowance and carers allowance.
Just to keep things nice and complicated, there are two type of National Insurance credits. Class 3 covers your state pension and bereavement benefits, Class 1 covers those as well as additional benefits like including Jobseekers Allowance.
There are also other less common circumstances where you might be able to claim National Insurance credits:
- Grandparents that are yet to reach state pension age may also be able to claim credits if they are caring for a grandchild under the age of 12.
- If you are married to somebody in the Armed Forces and have spent time overseas, you might be able to use the Military Spouses National Insurance Credit System to boost your state pension.
- You can also get credits for being on certain government approved training courses and when you are on jury service.
- If you serve a prison sentence and your conviction is overturned.
In most cases credits are applied automatically, but there are some circumstances where you may need to apply for a credit to be added to your record.
You can find out what credits you could be entitled to and whether you need to apply for them here.
Topping up your state pension
If you don’t have 35 years’ worth of National Insurance contributions (including credits), you might be able to buy top-ups to boost your state pension.
In the 2023-24 tax year, Class 3 National Insurance Contributions costs £17.45 a week or £907.40 for a full year and boost your pension by £5.82 each week or £302 over the course of a year.
This means voluntary National Insurance contributions could be an excellent investment, particularly if you are in good health and think you are likely to have a lengthy retirement. Typically, you only need to live around four years to recoup the cost of buying additional years.
However, if you were in poor health – and are concerned you might die in the next few years – it might make less sense. There might also be little point if the state pension is likely to be your only source of income in retirement. This is because you could be able to effectively plug that shortfall free of charge by claiming pension credit.
Normally you can only buy voluntary National Insurance contributions for the last six tax years. However, a ‘special offer’ is currently enabling men born after 5 April 1951 and women born after 5 April 1953 to go back an additional 10 years – so as far as 2016. This offer was initially due to end on 5 April this year, but has since been extended to 31 July due to high demand.
How can I find out where I stand?
If you are concerned about whether you have paid enough National Insurance, you can find out if you have any gaps in your record by applying for a state pension forecast online.
This will tell you how much state pension you are on track to get, when you can start claiming and whether you might be able to top it up.
If you aren’t sure whether it makes sense for you to top up your state pension you can also get advice from the government Future Pension Centre.
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