What is National Insurance

 13 Sep 2018

National Insurance (NI) is a tax that is based on earnings. Both employees and employers pay this contribution. The difference with any other tax contribution is that NI involves benefits for the taxpayer. The most common benefit is that this contribution can build towards state pension, but it also counts towards maternity allowance.

Your NI contribution is made on each pay period, so whenever you get paid (weekly, monthly or any arrangement between employer and employee) you need to contribute to National Insurance. If your monthly earnings vary, for instance, let's say that on a certain month you made more than the previous ones, you still need to pay NI. 

A threshold has been established so people have an idea of who is exempt from National Insurance contributions. Remember that this NI is something that the employer - not the employee - must do, that's why many companies rely this task on payroll bureaus. Professional providers can take care of this important yet slightly time-consuming process for companies, so you can fully concentrate on your business. Employees, contractors and the self-employed making more than £162 a week, must pay National Insurance contributions, and there are two types of contributions: If a person makes weekly earnings between £162 and £892 will pay 12% of that. If the weekly earnings go above £892, then you´ll pay 20% of those earnings.

Remember that this NI contribution (and also income tax) are taken off before the employee receives the wage. Senior married women and widows had the option to pay a reduced rate of National Insurance (according to the Married Women´s Reduced Rate), but that was until April 1977, some of them may still pay the reduced rate if back in the day they chose this option before it was terminated. Weekly earnings between £162 and £892 experience a 5.85% reduced rate, whereas everyone else pays 12%. Now, this may have a negative impact on state pension or any other benefits under National Insurance contributions. If you think you´ll be affected by this, you should check your current status. Once you reach your state pension age, the National Insurance contribution ends.

National Insurance is paid on what?

We already know that National Insurance is to be paid by both employer and employee based on earnings, which can also include: sick & maternity pay but also holiday pay as well. Basically, any reward that can be turned into cash is ruled by National Insurance duties. There's an exception to National Insurance contributions and it occurs when part of your salary is paid on shares that belong to the company.

What does National Insurance pay for?

The NI payments are gathered in a fund which basically serves two main entities:

  • The National Health Service

  • The State Pension

Other destinations for National Insurance contributions are towards unemployment benefits and sickness and disability allowances

It's important to understand what is National Insurance, who has to pay, exceptions and some critical considerations so you know what to expect. Keep in mind that we have payroll bureaus who take care of this processes professionally so you don't have to worry about them anymore. Look for assistance if you want to simplify the process so you can put your mind on enjoying your business.