What is National Insurance?

Definition of National Insurance

National Insurance is money paid to HMRC by employees, employers, and the self-employed. National Insurance is often abbreviated to NI, or NIC, where the 'C' stands for contributions.

Different people pay different kinds, or 'classes', of National Insurance.

Employee's National Insurance

Class 1 employee’s NI is usually calculated on each individual payment of wages, regardless of how much salary is received in the rest of the year. The calculation is based on each payment alone.

There’s an optional exception for company directors, who may choose instead to pay their employee's NI on the basis of their salary for a complete tax year, which means they may not start to pay employee's NI till some months into the tax year.

Employer's National Insurance

This is a type of Class 1 National Insurance that employers have to pay to HMRC in respect of their employees’ wages. It starts once the wages reach a certain amount.

It’s usually worked out on a payment-by-payment basis, but again can be worked out annually on a director’s salary.

The Employment Allowance can often be used to reduce or eliminate a bill for employer’s National Insurance.

Self-employed National Insurance

Self-employed individuals pay two classes of NI, a flat weekly rate called Class 2, and a percentage of their profits, called Class 4.

What you get for your National Insurance

Paying Class 1 employee's NI and Class 2 NI entitle you to receive certain state benefits, such as the State Pension. If you haven't made enough NI contributions, you may not get the full State Pension.

The current National Insurance rates are available on our UK tax rates tracker.

Disclaimer: The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

Frequently Asked Questions

Is there a Class 3 National Insurance?

Yes. Class 3 National Insurance is a voluntary amount that you can pay if you need to top up your NI contributions, so that you receive the full State Pension.

Can I see how much of my total tax is National Insurance?

FreeAgent’s accounting software for small business’s and freelancers gives a detailed tax breakdown showing exactly how your tax liability is calculated, including National Insurance. Your Tax Timeline also shows live updates of your tax position and deadlines which you can export in iCal format, then import into Outlook, Google Calendar and Apple iCal.

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