What is National Insurance?

National Insurance (“NI”) is referenced on your payslip every single month, but for many of us it just feels like another deduction that we may not really understand. So here is some background information on what it is and exactly how it works!

UK National Insurance Rates

If you haven’t already read the piece I have written on UK Income Tax, I’d recommend reading through it here as this goes hand-in-hand with it. In the UK, National Insurance is effectively just another tax that we have to pay. However, it goes towards a number of specific costs that Income Tax does not necessarily cover, these being the State Pension, welfare-based benefits and a small amount goes towards the NHS.

A common misconception is that State Pension is paid out from a pot that people have paid into but it is actually just a transfer of wealth from those paying NI towards those receiving State Pension and similar benefits in any given year.

Similarly to Income Tax, NI is built on a number of rates depending on your income. At current, this is what it looks like for employees:

  • Income to £12,570 - 0% NI

  • Income from £12,571 - £50,270 - 8%

  • Income from £50,271+ - 2%

As with Income Tax, this does not mean that you pay 2% on all income of say £60,000 but instead this is segmented into each income amount and is taxed appropriately.

Fortunately, there is no threshold at which that 0% NI band is lost unlike the personal allowance we see with UK Income Tax.

This is an interesting one as the tax rates decrease as you earn more whereas they increase with Income Tax.

You may note, that the rates are actually different for those of you who are self-employed and this is done to encourage people to build businesses (in a nutshell):

  • Income to £12,570 - 0% NI

  • Income from £12,571 - £50,270 - 6%

  • Income from £50,271+ - 2%

It is also key to note that this is an extra amount that you pay on top of income tax.

Why National Insurance matters

As this is linked to State Pension, each year you pay National Insurance you unlock a “qualifying year” towards you being eligible to earn State Pension. You must have 10 qualifying years to be eligible and you need 35 years to receive the full State Pension.

There are lots of other moving parts to this such as receiving NI credits if you are not working but claiming child benefits for children under 12, are claiming carer’s allowance, etc. but it is well worth accessing your HMRC account where you can check your current position on qualifying years. You are also able to “buy” missing years at certain points by paying a “per week” amount to fill in gaps in your NI record.