National Insurance contributions: Understanding the classes
30th Oct 2016
Everyone eligible to work in the UK is sent a National Insurance (NI) number automatically when they turn 16 years old. Whenever you work you’ll be asked for your NI number and, providing you are earning above a minimum amount, you’ll have to pay NI contributions on what you earn. Certain benefits depend on your contributions history.
Why do we pay?
National Insurance contributions are important: certain benefits such as the State Pension and Jobseekers Allowance depend on your contributions history.
Like tax codes, National Insurance is separated into categories. These are known as “classes” – we’ll take you through what they mean below. The class you pay will depend on your employment status, and if you have had gaps in employment that affect your National Insurance contribution history.
Class 1 – NI contributions
If you are employed then you’ll fall into Class 1 – most people are in this category. If your gross earnings (before any tax or pension is deducted) are above the current threshold of £155 (a week) or £8,060 (a year) earnings threshold then you’ll pay NI.
The amount you pay per week is a percentage set by the government annually and outlined here for 2016-2017.
• Those earning above the threshold pay 12% of their earnings between £155 and £827 per week (or between £8,060 and £43,000 a year).
• Earnings above £43,000 pay National Insurance at 2%.
• Earnings below the threshold aren’t deductible.
• If you earn from £5,824 a year or up to the lower earnings limit you can still build up rights to benefits via National Insurance Credits.
Generally, NI is calculated and deducted directly by your employer – so you’ll see it on your payslip and you don’t need to do anything. Your employer also makes Employer Contributions on your behalf – these are not deducted from your pay though.
Class 2 – NI contributions
If you are self-employed you’ll need to pay Class 2 contributions. For 2016-2017, these are £2.80 a week. You’ll need to make arrangements to pay these directly yourself. If your profits are less than £5,695 a year you can choose not to pay National Insurance.
Class 3 – NI contributions
Class 3 contributions are “voluntary contributions”. You might ask why anybody would volunteer to pay tax if they didn’t have to. The answer is that it can be worthwhile to make up any gaps in your contribution history so that, for example, you can still qualify for the state pension.
You can pay them only if:
• you aren’t employed,
• you’re exempt or not liable for Class 1 or Class 2 contributions, or
• your contributions in any specific year leaves a shortfall in the amount that counts towards your state pension entitlement.
Class 3A – NI contributions
This voluntary contribution came into play in October 2015 to enable those who reached state pension age before April 2016 to top it with a lump sum payment. This would enable anyone contributing more, to earn from £1 and £25 extra per week on top of their normal state pension.
• To earn an extra £1 per week or £52 per year, you would need to pay a lump sum of £890.
• To increase and earn the maximum contribution available, you would pay a lump sum of £22,250 to earn an extra £25 per week or £1,300 per year.
Class 4 – NI contributions
This category is for self-employed people with higher earnings.
• Those who earn profits between £8,060 and £43,000 a year pay 9% contributions.
• Any profits earned over £43,000 a year incur 2% contributions.
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