As an employee living and working in the UK, you will pay income tax and national insurance on your earning through the PAYE system. PAYE stands for pay as you earn. The national insurance scheme is administered by HM Revenue and Customs (HMRC).
Each person has an allowance that lets them earn up to a certain amount of income per year before income tax and national insurance are deducted. This is called your Personal Allowance, and most people get the same standard rate of £10,600 for the year 2015-16, rising to £11,000 for 2016-17. However, you may get more if you were born before 6 April 1938 for example, or less if your income is above £100,000.
Your national insurance contributions will be taken through PAYE by your employer on a weekly or monthly basis if you earn more than £155 per week. The standard rate of contribution is 12% of your earnings above that level. However, if your employer has a contracted-out pension scheme and you’re already enrolled in it, you will pay less National Insurance. From 2016 contracting out will be abolished as the new flat-rate State Pension will be introduced.
History of NI
National Insurance payments were introduced in 1911, and were to provide a government safety-net for workers who fell out of employment, or suffered health problems that needed treatment. How it worked was that each employee paid a contribution into the scheme out of their earnings each week or month so that if they fell on hard times, such as needing medical treatment or lost their job, they could make a claim for support from the fund to pay their medical bills or support themselves financially until they found alternative employment.
The national insurance system has changed over the years, and is a far cry from how it worked in 1911. National Insurance (NI) is now used to pay for many different things:
• The NHS
• Unemployment benefit such as JSA, Tax Credits and Universal Credit.
• Sickness and disability allowances such as PIP, DLA and ESA.
• The age-related state pension
National Insurance is mainly only spent in these areas, but the government can borrow from the fund to help pay for different projects.
How much NI do I pay?
How much National insurance you pay as an individual will depend on your circumstances. You pay national insurance contributions if you are working, over 16 years old and under the pension age, and earn over your personal allowance. So for example if you currently work for a company you will pay NI contributions on money you earn over £155 per week at a rate of 12%. You do not pay NI if you are under 16, and once you reach your pensionable age, you stop paying it completely. Self-employed workers may have to pay some Class 4 NI contributions depending on their earnings after they reach state pension age, if they choose to keep working.
What is a National Insurance Number?
A National Insurance number (NINO) is your unique number given to you by HMRC, and it is used to keep a record of your NI contributions. If you need to claim tax credits or any sort of benefit, you will need a National Insurance number to be able to claim, and you will also need to give this number to your new employers when you start a new job. The number is made up of two letters, followed by six numbers, and ending in one letter, so for example your NI number could look like this: AB 123456 Z. This number is unique to you, and you must never let anyone else use your NI number.
A young person living with their parents in the UK, and approaching their 16th birthday will be automatically registered for NI and their unique number will be sent to them shortly before their birthday. If you don't have an NI number, then you are legally obliged to apply for one when starting work, or if you or your partner wish to claim benefits.
If you are not sure what your NI number is, then you can usually identify it through checking your work pay slips, looking at your end of year statements of tax and NI contributions, or it will be listed on your benefit decision letters. If you still cannot find your NI number you can get help to find it from HM Revenue and Customs National Insurance Registrations Helpline on 0300 200 3502 (text phone: 0300 200 3519)
Do I need to report any changes?
There are certain changes in circumstances that need to be reported to the HMRC National Insurance Contributions Office. You should alert them of any of the following changes:
• move house
• change your name by deed poll
• get married or register a civil partnership
• get divorced or dissolve a civil partnership
• you become widowed, or your civil partner dies.
Your changes will help HMRC to keep track of your NI contributions, and will have up-to-date information should they ever need to reach you. They will also need your correct address details for when you become eligible to claim for your state pension.
Any changes you make can be reported to HMRC via their email service at: www.gov.uk, or you can telephone the National Insurance Helpline for employees on 0300 200 3500, or for the self-employed on 0300 200 3505.
What if I don't have a National Insurance number
Applying for a National Insurance number can be done through the Jobcentre Plus National Insurance number application line on 0345 600 0643 (textphone: 0345 600 0644). You will need to provide them with enough information about yourself to enable them to begin the application. You will need your NI number to make a claim for tax credits or any in-work or unemployment benefits, and the officer dealing with your claim can start the application process for you. You will need to provide enough information to allow them to do so.
Your local Jobcentre Plus may ask you to attend an interview to confirm your identity as part of the process to get your NI number. They will tell you what documents you need to bring. Once HMRC is satisfied with your information, you will be issued with your NI number.
When you are starting work and you need to provide your NI number to your employer, you will also be required to provide proof of your identity and evidence to prove you have a right to work in the UK before you can be issued with an NI number. If you don't have the right to work in the UK, then you cannot get a National Insurance number.
Classes of national insurance contributions
NI contributions are separated into six different classes, and two of the classes are only paid by employers. Which class you fall into will depend on whether you are an employee, self-employed or you are paying contributions voluntarily to make up gaps in your contribution record. Gaps may be caused through years of study in education, low-wage employment, unemployed but not claiming benefits, self-employed with small profits, or living abroad. Having gaps in your contribution record can mean that you may not be able to qualify for the full state pension because you don't have enough qualifying years.
Class 1A contributions
Your employer will pay Class 1A contributions if you receive certain benefits with your job that are worth more than a certain amount each year, such as a company car for example. Class 1A contributions have to be paid if you are a company director.
Class 1B contributions
These are paid by an employer when they are entered into PAYE settlement agreements for the payment of tax to HMRC.
Class 2 contributions
Class 2 contributions are paid by the self-employed and have recently been switched for this financial year (2015-16) from monthly payments to end of year payments that you submit with your Self Assessment tax payments that are due by the end of January the following year. When your earnings are low from self-employment, and fall within the Small Profits Threshold, you will not be required to pay any contributions. However, you can choose to pay NI contributions voluntarily if you wish to prevent any payment gaps in your contribution record. Depending on the level of your profits, you may also have to pay Class 4 contributions.
Class 3 voluntary contributions
This class of contribution is paid voluntarily if you do not have to pay any other compulsory contributions. This may be the case if you are on a low income and want to avoid contribution gaps in your records. An example would be a person with a low income part-time job or someone doing seasonal work. Parents and carers receive credits that are counted as Class 3 contributions.
Class 4 contributions
These payments are made by self-employed people with a high profit business. Class 4 contributions will normally be paid alongside your income tax each year. You can check the rate of Class 4 contributions you may have to pay by visiting the GOV.UK website at www.gov.uk.