National Insurance explained

National Insurance explained

The National Insurance system acts as a safety net providing financial assistance if you fall ill, are unemployed or on a low income. It also funds the basic state pension.

Written by Abigail Montrose on 24 September 2013


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National Insurance contributions (NICs)

Anyone aged between 16 and the state pension age who is working pays NICs unless they are on a low income. Your NICs usually build up your entitlement to certain state benefits including financial help if you are unemployed or sick, and your basic state pension.

There are different rates of NICs.

  • Class 1 NICs are paid by employees.
  • Class 2 NICs are flat-rate contributions paid by the self-employed. They also pay Class 4, based on annual taxable profits and paid at the same time as income tax, but these do not build up any benefit entitlement.
  • Class 3 NICs are voluntary contributions. You may want to pay these so that you can build up your entitlement to state pension or bereavement benefits for your survivors.
  • Other NICs rates include a reduced rate for married women and widows (which do not build up benefit entitlement), and special rates for share fishermen and volunteer development workers.

For the latest rates see our National Insurance tables.

National Insurance credits

If you're unable to make NICs you may be able to get NI credits. You may qualify for these if you fall into one of the categories below.

  • You are unemployed or unable to work due to illness and are claiming certain benefits such as Jobseeker's Allowance (JSA), Employment and Support Allowance (ESA), Incapacity Benefit or Universal Credit.
  • If you get Statutory Sick Pay, Statutory Maternity Pay, Statutory Paternity Pay or Statutory Adoption Pay and the total you are getting is too low for you to be paying NICs.
  • If your earnings are too low for you to be paying NICs, but you are getting Working tax Credit.
  • You are getting Maternity Allowance or Carer's Allowance.
  • If you're on an approved training course.
  • When you do jury service.
  • If you have been wrongly imprisoned.
  • If your spouse/civil partner is in the armed forces and you accompany them abroad.
  • If you are not working because you are caring for a child under the age of 12 or someone who is sick or disabled. If you are claiming child benefit, you will get these credits automatically. (Before 2010, you built up Home Responsibilities Protection which has now been converted to NI credits.)
  • In many cases, for the years in which you reached ages 16, 17 and 18. However, these credits have been abolished for people reaching these ages on or after 6 April 2010.

NICs and state benefits

Some state benefits are based on your NICs. State benefits which are based on your NICs are called 'contributory benefits' and include:

The Government is moving to a simplified or single-tier state pension, with a phasing out of the Second State Pension (S2P, formerly called the State Earnings Related Pension or SERPS). The first step was the ending of contracting out of S2P for money purchase pensions in 2012 and final salary pensions in 2013.

Assuming the changes are agreed by Parliament, the new state pension will start for people retiring in 2016. To qualify for the full pension you must have a 35-year record of NI contributions or credits.

See the MoneyVista guide on how the new state pension works.

Checking your NICs record

Your National Insurance (NI) number is unique and never changes even if you emigrate, marry or change your name. The social security system identifies you by your NI number and all your NICs are recorded. Your NI number is also used by HMRC, your employer and your local council if you claim Housing Benefit or Council Tax Reduction (formerly Council Tax Benefit).

To check your NICs record contact the National Insurance Contributions Office on 0300 200 3500 and ask to be sent a National Insurance statement. Alternatively, you can apply for a statement online – the HMRC website has details of how to do this and the information you will need to provide.

Voluntary contributions

You can top-up your NICs by making voluntary NICs. You may want to do this to build up your entitlement to the state pension and various bereavement benefits.

To make voluntary NICs you usually have to pay Class 3 NICs (£13.55 a week for 2013-14) or you may be able to make a one-off payment.

Our tax calculator can help you work out your National Insurance and income tax bill for the year.

For more on National Insurance visit the Gov.UK website at www.gov.uk/national-insurance

 

Autumn Statement 2013 news

  • From April 2015, employer National Insurance contributions will be abolished for employees under 21 earning less than the upper earnings limit (£813 a week). This applies to existing employees and new staff. This change will not affect the entitlement of the employee to the state pension.
  • The government is planning to introduce a new type of voluntary NICs. Class 3A contributions will allow those who reach state pension age before 6 April 2016 to boost their additional state pension. It's expected that this option will be available from October 2015. 
  • For more information on the Autumn Statement see our guide.

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