What are National Insurance Contributions?​

National Insurance Contributions (NICs) are payments taken by HMRC from your Pay As You Earn (PAYE) earnings, or from your business profits if you’re self-employed. They’re taken on top of other taxes like Income Tax, and go toward things like the State Pension and various benefits.

What are benefits in kind?

National Insurance Contributions come in 4 basic types. Depending on your work and other circumstances, you may have to pay more than one type:

Class 1 NICs

These are the National Insurance Contributions paid by most UK employees. They’re taken automatically from your earnings by your employer, through the PAYE system. You keep paying Class 1 NICs until you hit the State Pension age.

Class 2 NICs
Self-employed people don’t generally use the PAYE system to pay their tax. Instead, they file Self Assessment tax returns each year to tell the taxman about their profits and business expenses. Since they don’t have an employer, they pay Class 2 NICs rather than Class 1, which are handled through the Self Assessment system.

Things changed a lot for the self-employed with the 2024 Spring Budget, which saw the abolition of Class 2 NICs. However, self-employed people with total profits under £6,725 a year can chose to keep paying NICs, to make sure they're still entitled to the state benefit they cover.

Class 3 NICs
If you’ve got gaps in your National Insurance history, you can make voluntary NIC payments to plug them. These voluntary payments are called Class 3 NICs. They can make good sense if you’re looking to make sure you qualify for things like the maximum State Pension rate.

Class 4 NICs
Class 4 National Insurance Contributions are another kind of payment made by the self-employed. If your profits from self-employment are high enough, you pay Class 4 NICs as well as Class 2.

Things get slightly more complicated if you’ve got more than one kind of income. Employees who also have some self-employment income could find themselves paying Class 1 NICs through the PAYE system and (until their abolition on the 6th April 2024) Class 2 NICs through Self Assessment.  If their self-employment profits are high enough, they’ll pay Class 4 NICs as well.

The rates for National Insurance Contributions depend on the class you’re paying. 

• Class 1:

From 6th April 2023 to 5th January 2024: 12% on income from £242-£967 per week. 2% on income over that threshold.

From 6th January 2024 to 5th April 2024: 10% on income from £242-£967 per week. 2% on income over that threshold.

From 6th April 2024: 8% on income from £242-£967 per week. 2% on income over that threshold.

• Class 2:

Before the 6th April of 2024: £3.45 per week if your profits are over £12,570 a year.

After the 6th April 2024: Class 2 NICs are abolished. You can still opt to pay them if your profits are under £6,725 to keep your entitled to the state benefits they cover.

• Class 3:

£17.45 per week. These can be paid to make up for gaps in your National Insurance record.

• Class 4:

Before the 6th April 2024: 9% on profits between £12,570 and £50,270. 2% on profits over that threshold.

After the 6th April 2024: 6% on profits between £12,570 and £50,270. 2% on profits over that threshold.

National Insurance Contributions don’t kick in from the very first penny you earn. In fact, if you’re under 16 you won’t pay them at all.

If you’re over 16:

• For employed people, weekly income up to £184 won’t count toward your Class 1 NICs.
• For the self-employed, yearly profits of up to £6,515 won’t count toward your Class 4 NICs.

Keep in mind earning too little to pay National Insurance Contributions won’t necessarily mean you end up with holes in your record. If you’re earning under £184 a week from employment, for instance, you count as having paid your NICs. Basically, you’ve got some automatic protection built into the system.

If you’re self-employed, but your profits are too low to pay Class 2 NICs, you can still make voluntary Class 2 payments. This can be important in making sure you still qualify for certain benefits.

Another thing to keep in mind is that your earnings don’t get “averaged out” when your National Insurance Contributions are calculated. For instance, if you earn enough in one week to pay Class 1 NICs, you won’t get that cash back just because you earn less the next week, or for the rest of the year.