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National Insurance – Need to know

If you're self employed, or working for someone else, it can seem quite daunting when you're told you have to pay someone and you have little to no control over it. Below the process has ben explained and will show you that you don't have to worry too much and it’s actually a fairly simple process. 

What is National Insurance?

National Insurance is a number of contributions that are paid to the UK Government in order to provide benefits to employees. These benefits can be:

  • Insurance against illness and unemployment
  • Retirement pensions

So it's not such a bad thing because you do get a return from it such as your pension and sick pay when you qualify for it.

Qualifying

Not everyone has to pay National Insurance Contributions (NIC). In order to qualify you must:

  • Be over the age of 16
  • Be self employed, earning an annual profit of at least £5,965
  • Be employed and earning at least £155 weekly/£672 monthly (more information)

In order to pay NIC you will need a National Insurance Number, this is generally posted out to you on, or just after, your 16thbirthday. This number will stay with you for your entire life and never change.

The Different Classes

There are different classes of National Insurance. The type that you pay will vary on the type of employment you are in and the amount of money that you earn.

National Insurance Classes 2019/20

National Insurance class

Who pays

Class 1

Employees earning more than £162 a week and under State Pension age - they’re automatically deducted by your employer

Class 1A or 1B

Employers pay these directly on their employee’s expenses or benefits

Class 2

Self-employed people - you do not have to pay if you earn less than £6,205 a year (but you can choose to pay voluntary contributions)

Class 3

Voluntary contributions - you can pay them to fill or avoid gaps in your National Insurance record

Class 4

Self-employed people earning profits over £8,424 a year

When do I stop paying NI?

  • If you're employed then you stop paying Class 1 NIC by the time you reach the state pension age bracket.
  • If you're self-employed then you also stop paying Class 2 NIC by the time you reach the state pension age bracket (or about 4 months after in order to clear any charge that you owe).
  • If you pay Class 4 NIC then you stop paying on 6thApril of the year that you reach the state pension age bracket.

Recognising your National Insurance Number

Your National Insurance number is alphanumeric and 9 digits long, it will never change. It ensures that any NIC you pay will be logged against your name. It will always be in the format of AA 11 11 11 A. Many different organisations can request your National Insurance number as a form of proof of entitlement to work in the UK. Your National Insurance number can be found on:

  • Your Tax Return
  • Your P60
  • Your Payslip

Who needs to know your NI number?

It is important that these organisations/people know your National Insurance Number:

  • Your employer, in order to declare to HMRC how much you have been paid
  • HMRC
  • Your local council (if you're claiming Housing benefit)
  • The DWP (department of work and pensions), if you're claiming state benefits
  • Electoral Registration Officers (to verify your identity should you wish to register to vote)
  • Your ISA provider, if you wish to open one
  • Your bank or building society in relation to tax on interest
  • The Student Loan Company, if you're applying for one.

To protect against fraud you should never reveal your National Insurance Number to anyone who doesn't need it.

Taking on an employee

Before someone starts working for you, ensure they provide you with their National Insurance number for payroll. Without it, you won't be able to run payroll and submit their details to HMRC.

It's always worth reading any starter guides for your specific payroll software, as these normally tell you what information would be required including their name, date of birth and address.

It’s your responsibility to ensure you have the correct information to pay your employees and ensure all deductions are made for HMRC. See Employing staff for the first time for more information.

Paying NI

  • When you're employed your employer as tax takes NI from your wages.
  • If you're self-employed and claiming Class 2 or Class 4 NIC then you pay through Self-Assessment. There are regulations in place for certain individuals that do not pay Class 2 NIC through their Self-Assessment.
  • If you are a combination of self-employedand employed then your employer will subtract and Class 1 NIC from your wages and you will have to claim Class 2 and Class 4 through your Self-Assessment for your self-employed work.
  • If you're the employer, when you submit the RTI (Real Time Information) data to HMRC during payroll, you'll be told how much you will need to pay for your employees. Your payroll software should also deduct this from their gross pay for that pay period. You can then pay HMRC in a number of ways.

National Insurance can be tricky if you don't know much about it but there is plenty of information and guidance available on the HMRC website.