What exactly is National Insurance?

Paul Lewis / 28 February 2017

No other tax puzzles people as much as National Insurance. Here’s how much you need to pay, what it’s for, and what happens when you hit pension age.



Money expert Paul Lewis addresses your National Insurance concerns…

1. I’m working and I’ve already paid enough National Insurance Contributions to get my pension. Why do I have to carry on paying?

National Insurance (NI) has two quite separate functions. Its main purpose is a tax on earned income. It has to be paid in any job where you earn more than £155 a week. It also determines how much state pension you’ll receive.

People who reach state pension age now need 35 years of contributions (NICs) to get a full pension. But even if you’ve paid 35 years’ worth, you must still pay National Insurance if you’re working as it is a tax – one raising around £125 billion a year.

How to check your National Insurance contributions

2. How much National Insurance do I pay?

If you are an employee National Insurance is 12% of your pay when you earn between £155 and £827 a week (£8,060 to £43,000 a year) and 2% of your pay above that. Employers also pay National Insurance on employee earnings.

If you are self-employed, it is a bit more complicated. You pay two different sorts of NICs:

Class 2 contributions are £2.80 a week and must be paid for every week you are self-employed. If you make profits below £5,965 a year, ask if you can be exempt from paying Class 2.

Class 4 contributions are a percentage of your profits (not your turnover). They are 9% of profits between £8,060 and £43,000 a year and 2% of profits above that.

Find out how the Saga Annuity Service, provided by Legal & General, may be able to help you get more retirement income from your pension.

3. Do I have to pay once I’ve reached state pension age?

No. National Insurance has to be paid by workers aged between 16 and state pension age. If you are an employee, your last payment will be in the weekly or monthly pay period in which you reach state pension age. Employers continue to pay National Insurance for workers who are over state pension age.

If you are self-employed, your last Class 2 contribution will be in the week you reach state pension age. But Class 4 contributions must be paid for the whole tax year. So if you reached state pension age on July 6, 2016, Class 4 are payable on your profits for the whole of 2016/17, but not in 2017/18.

4. What is National Insurance used for?

In 2017/18, National Insurance will raise about £125bn; £24bn of that goes to the NHS. 

The remaining £101bn will go into the National Insurance Fund, which can only be used to pay for certain things. The state pension is the biggest item paid from the fund – more than £94bn goes on that. 

Today’s National Insurance pays today’s pensions. It is not saved up to pay your pension later. 

It is also used to pay for other contributory benefits. Employment and support allowance costs £4.5bn, bereavement benefits £536m, maternity allowance and parental pay £458m, and jobseeker’s allowance £331m. Administration costs £841m.

Looking after a grandchild may boost your pension

5. Does the National Insurance Fund ever have a surplus?

In some years the National Insurance Fund has more income than it uses, in others less. 

It needs a float of around £16bn. If it falls short of that, the Treasury can make a grant as it did in 2014/15, but that will probably not be necessary in the next five years. 

In 2017/18 the fund is expected to spend slightly more than it receives. That will come from its current balance of £21bn. There are no plans to spend the ‘excess’ £5bn above the £16bn it needs in hand.

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6. I am self-employed: how do I pay NI?

In the past Class 2 contributions were paid by direct debit every four weeks. But since April 2015 they have been collected once a year. 

If you do a self-assessment tax return, they are paid through that. If not, you should have been sent a bill for £145.60 on October 31 last year to cover the whole of 2015/16. If that’s hard to pay, you can ask to spread the cost. Or, if your profits were less than £5,965, you may be exempt.

From April 2018 Class 2 contributions are being scrapped. At the moment these qualify self-employed people for the state pension. 

From April 2018 it will be Class 4 contributions that count. Every year that your profits are around £6,000 or more will qualify as one year towards the 35 needed for the state pension. If your profits are less than that you will be able to buy voluntary Class 3 contributions, which currently cost £733 for a year.

Will pensioners have to pay National Insurance?

Saga Employment Report

Older people are making a bigger contribution to the economy by working longer, according to the latest research from Saga.

Nearly one and a quarter million people over 65 are actively at work. That is a rise of more than a third since 2011. The growth among 16-49s is less than 5%. The number of 50-64 year olds in work has grown by more than a million, an increase of nearly a sixth.

Older people are not squeezing younger ones out of work. Unemployment and long-term unemployment among the younger age groups are falling.

Source: ONS data analysed by CEBR for Saga Employment Report


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The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.