National Insurance contributions are paid to build an entitlement to a number of state benefits, particularly the State Pension. Other benefits which depend on your contribution record are the contribution-based Jobseeker’s Allowance, Bereavement Allowance and contribution-based Employment and Support Allowance. They are also applicable to Maternity Allowance and Incapacity Benefit.
The scheme was first introduced in 1911 and has been repeatedly amended since then.
Mandatory contributions are paid both directly by employees and by employers on their behalf. Self-employed workers contribute through a fixed regular payment in addition to a percentage of their net profits once those reach a certain level.
Over the years, the National Insurance has become a significant contribution to government revenue: in 2010/2011, this amounted to 21.5% of the total collected, or £96.5 billion.
All contributors have a personal National Insurance number, which identifies them uniquely and is used to claim benefits.
Contributions are paid on a sliding scale and fall into different classes.
Class 1 contributions are paid by employees and their employees. Those who earn between £139 and £817 per week pay 12% of the amount earned above £139. On incomes above £817 per week, an additional 2% of the excess is also paid. These contributions are deducted from wages by the employer.
Class 2 and Class 4 National Insurance contributions are paid by self-employed workers.
Class 2 contributions are paid at a flat rate of £2.50 per week while Class 4 contributions are a percentage of annual taxable profits. For profits between £7,225 and £42,475 a contribution of 9 per cent is paid and a further 2 per cent on profit which exceeds that figure.
Self-employed contributors whose profits are expected to fall below £5,315 may be exempt from Class 2 National Insurance contributions.
The lower earnings limit for Class 1 National Insurance contributions increased in 2011/12 to £139 from £110 in the previous year, with the upper limit being decreased from £844 to £817.
NI Tax Code
The rates at which contributions are paid by a worker and their employer vary on the basis of a number of factors. HMRC uses an alphabetic code known as the NI Table Letter to each possible combination of rates. The determination of rates is complex and the HMRC publishes a set of tables for each table letter to assist with this. Fortunately computers have taken much of the difficulty out of calculating rates.
It is important for employees who are working for more than one employer to ensure that they are not overpaying national Insurance. In such a case it is possible to defer contributions from one employer to prevent the overpayment.
Contributors who have a break in their National Insurance contributions may need to top up with voluntary contributions. These may be paid for any of the six years prior to the year of payment, although in some circumstances concessions may apply for other years.
Thirty qualifying years of contributions must be paid in order to receive the full Basic State Pension. Proportionally lower rates of pension are applicable to a shorter qualifying period.