The world of British tax can feel like a maze, and National Insurance (NI) is a crucial part of that puzzle. Whether you’re an employee, an employer, or self-employed, understanding NI is key to ensuring your financial health. NI Contributions (NICs) are essential for accessing the State Pension and various state benefits, but not everyone is required to make them. In this article, we’ll take a detailed look at how NICs work, and what it means for your bottom line.
The Basics: NI Classes and Thresholds
Your NICs are determined by two factors: your earnings (or profits if you’re self-employed) and the Class you fall under. Here’s a quick overview:
- Class 1: For employees and employers, subject to certain earnings thresholds.
- Class 2: For self-employed individuals exceeding the Lower Profits Threshold, payable at a flat weekly rate. Voluntary contributions are also possible if profits are less than this threshold.
- Class 3: Voluntary contributions for those with insufficient earnings or profits to meet NI thresholds.
- Class 4: For self-employed individuals earning above the Lower Profits Limit, with percentage-based contributions in addition to Class 2.
Each class has unique earnings/profits thresholds that dictate whether you need to make NICs and how much they will be.
Class 1 NICs: What You Need to Know
Class 1 is the most common type of contribution. It has several thresholds that affect how much you’ll contribute, broken down as follows:
| Threshold | Weekly (£) | Monthly (£) | Annually (£) | Description |
|---|---|---|---|---|
| Lower Earnings Limit (LEL) | 123 | 533 | 6,396 | No NICs required, but credited for NI record. |
| Primary Threshold (PT) | 242 | 1,048 | 12,570 | Employee NICs of 12% apply between PT and UEL. |
| Secondary Threshold (ST) | 175 | 758 | 9,100 | Employers pay an additional 13.8% NICs on your behalf. |
| Upper Earnings Limit (UEL) | 967 | 4,189 | 50,270 | Extra NICs at a lower rate of 2% applied to earnings above UEL. |
It’s worth noting that your employer will handle these calculations for you via PAYE, determining the correct rate based on your earnings.
Self-employed? Here’s What You Need to Know About NICs
If you’re self-employed, you’ll deal with two classes: Class 2 and Class 4, each with its own thresholds.
Class 2: A flat rate of £3.45 per week, applied if your profits exceed the Lower Profits Limit.
Class 4: A percentage rate on profits, with 9% applied up to the Upper Profits Limit, and 2% on anything exceeding this limit.
The Lower Profits Limit for both is £12,570 for 2023/24. If you exceed this limit, both Class 2 and Class 4 NICs will apply. If you earn above £50,270, you’ll contribute 2% on everything above this Upper Profits Limit.
The Importance of Voluntary National Insurance Contributions
While some earnings/profit levels exempt you from making NICs, it might be beneficial to make voluntary contributions. Doing so can help secure a ‘qualifying year’ towards benefits like the state pension. By filling gaps on your National Insurance Record with voluntary contributions, you could unlock access to the full state pension.
Wrap-Up
Keeping track of your NICs is critical to managing your finances and planning for your future. Here’s a quick recap:
- Employers pay Class 1 NICs on behalf of employees if earnings exceed the Secondary Threshold (£9,100).
- Employees pay Class 1 NICs only if their earnings are above the Primary Threshold (£12,570).
- Self-employed people pay NICs based on profits, with possible Class 2 (flat rate) and Class 4 (percentage) contributions.
If you need help understanding your NICs and broader tax obligations, Devonshire Green is here for you. Schedule a free consultation with one of our accounting experts today and discover how we can make tax easier for you.
