Most people pay NIC before they get their wages - but do you know why you pay NIC and whether you in fact need to pay any contributions. We explain how NIC works in this part of the website and we also look at where to get an NI number and how to work out what you will pay.

We cover a number of topics here for anyone who is employed. If you are self employed please have a look at the NIC section in the self employed part of the website.

The topics we look at here include:

What are National Insurance Contributions (NIC)?

How do I get an NI number?

Do I have to pay NIC?

What is Class 1 NIC?

What if I have more than one job?

If I am employed and self employed so do I need to pay NIC on both my jobs?

What are voluntary contributions?

How do I pay my NIC?

What benefits do my contributions pay for?

Do I have to pay NIC on any loans I have from my job?

What are National Insurance Contributions (NIC)?

• National Insurance helps to pay for some State Benefits including retirement pensions. Your National Insurance earns you the right to receive certain benefits.



• You pay National Insurance Contributions (NIC) between the ages of 16 and state pension age on earnings (but not pensions). This is currently 65 for a man and 60 for a woman.



• After state pension age even if you have a job you do not need to pay any more contributions.



• A National Insurance number is unique to you throughout your life but it is not a form of identity. It is made up of 2 letters, 6 numbers and a final letter for example ZY 98 76 54 A.



• Everyone who wants to work in the UK must have a National Insurance number. To obtain a National Insurance number you must be 16 or over and resident in Great Britain or Northern Ireland.



• You can start work without one but you must then apply immediately. The law requires you to apply for a number if you do not already have one and you are working or are intending to work.

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How do I get an NI number?

• You need to contact the Department for Work and Pensions (DWP) office nearest to where you live or work and ask for an appointment to be interviewed for an NI number. You will need to take some identity with you when you go but full details of this will be provided before your interview.



• You can find the telephone number and textphone number of the local DWP office in your telephone directory or Yellow Pages.



• There is some very useful information on how to apply for an NI number on the Directgov website.



• Once your application is successful you will receive a plastic NI card - take good care of this as it is your reminder of your NI number and you will need to use it when you contact the Revenue or DWP. As soon as you have your NI number you should tell your employer immediately.

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Do I have to pay NIC?

• Whether you are working for an employer or are self employed and working for yourself or for a partnership will affect the type of contribution you pay.
• There is a lower limit and if your income falls below this you will not need to pay any contributions. For 2010/11 this limit is £110 a week or £476 monthly. State benefit entitlement begins where your wage is over £97 per week. Click here for more information
• You can see to work out your own NIC in the example Anya

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What is Class 1 NIC?

• These are the contributions you pay if you work for an employer and your earnings are above the lower limit mentioned above



• The actual amount you pay depends on what you earn up to the maximum earnings limit (£43,875 for 2010/11) The NIC is taken off your wages before they are paid to you.



• Your employer also has to pay contributions based on your earnings but you need not worry about these. For 2010/11 the weekly rates of Class 1 NIC for employees are as follows:




On first £110 Nil On income between £110 to £844 11% On amount above £844 1%

• You can see to work out your own Class 1 NIC using the examples Karim & Roger



• You may come across Class 1A & Class 1B NIC - these contributions are not paid by employees but you might hear them mentioned so it is as well to know what they are:



• Class 1A contributions are paid by your employer if they provide you with a car for private use. The employer pays the contributions on the car and any petrol provided for it.



• Class 1B contributions are paid by employers who enter into a special arrangement with the Revenue.

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What if I have more than one job?

• Unless you are a director of a company, each employment you have is looked at separately and each has the weekly £110 lower limit.

  If, in the 2010/11 tax year you have two jobs, and expect to pay Class 1 NICs on weekly earnings of at least £844, throughout the whole tax year in one of these jobs you can ask to defer payment in the other job. You do this on form CA72A. If you need them there are guidance notes you can download from the HMRC website.

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If I am employed and self employed so do I need to pay NIC on both my jobs?

• If you are both employed and self employed you need to pay both Class 1 NIC on your employed income and Class 2/4 NIC on your self employed income.

  However you may defer your Class 2 NICs if you are likely to pay Class 1 NICs on earnings of at least £844 each week for the whole tax year.

  You may defer some of your Class 4 NICs if you can show that you are likely to pay too much in Class 1, Class 2 and Class 4 NICs. Form CA72B can be used to claim deferral for the current year. If you need them there are guidance notes you can download from the HMRC website.

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What are voluntary contributions?

• These are voluntary contributions called Class 3 NIC you can pay if you do not pay Class 1 or Class 2 but you want to protect your rights to some state benefits.
• Click here to read more about which benefits are affected by your NIC. The contributions can be paid using the same methods as Class 2 or you can pay a lump sum at the end of the year. For 2010/11 the rate is £12.05 a week.
• You can see how voluntary contributions work in the example Roger

How do I pay my NIC?

• Class 1 NIC - Paid through your earnings - taken out of your gross wages by your employer so that he just pays you the net amount.
• Class 2 NIC (self employed only) - Paid normally by quarterly bill or monthly by Direct Debit
• Class 3 NIC - Paid normally by quarterly bill or monthly by Direct Debit or by making an annual lump sum payment.

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What benefits do my contributions pay for?

• For some UK benefits you need to have paid NIC contributions - these are called Contributory Benefits. There are other benefits where provided the rules for claiming apply to you, it does not matter whether or not you have paid any NIC.
• Benefits which do not depend on NIC include:

Attendance Allowance and Disability Living Allowance

Child Benefit

Guardian's Allowance

Income based Jobseeker's Allowance

Industrial Injuries Benefits

Carer's Allowance

Severe Disablement Allowance

Statutory payments (e.g. Statutory sick pay)

• Use the following table to see which type of contribution counts towards which benefit:

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Do I have to pay NIC on any loans I have from my job?

• Loans are not earnings for National Insurance (NIC) purposes. Nor is Class 1 NIC due on the the cash equivalent of the benefit of an interest-free or low-interest loan.



• Class 1A NIC may become payable if the loan is written off or waived. NIC is due at that point on the then sum outstanding.



• Your employer needs to notify you formally that he is releasing you from the loan – he should not merely leave it uncollected, as in the latter case the loan remains in existence, at least until the end of the limitation period (normally six years). Once that period has expired, a National Insurance charge will arise (if it has not already done so), notwithstanding that the loan does not cease to exist, but simply becomes uncollectable.



• Where a loan which has been charged to NIC is later repaid in whole or in part - then depending on how much is actually repaid - the appropriate amount of NIC charged should be repayable.



• An advance of pay (or a sub) is effectively a loan and is not normally liable to NIC at the date of the advance. Instead, NIC is due at the time your pay would have normally been due (i.e your usual pay day).



• If you are off work as a result of an injury or accident, and your employer makes you a loan whilst you are waiting for the result of a claim for damages, the loan is treated as earnings for National Insurance purposes at the date of payment (unless you are obliged to repay it) whatever the outcome of the claim.



• Again, if NIC has been paid under this rule, and you later repay the loan in whole or in part, a refund is due. If the repayment is in the same year as you paid the NIC, an adjustment will be made in your next pay packet. If not, you will need to get a refund from HMRC National Insurance Contributions Office.

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Karim - working out NIC for 2010/11 Karim earns £10,920 per year (£210 a week) in his job as a milkman. Each week he will pay Class 1 NIC of: £ First £110 Nil £210-£110 = £100 @ 11% 11.00 £ 11.00

Roger - working out NIC - voluntary contributions 2010/11 Roger has a job with the local bank. He earns £14,820 a year (£285 a week). Each week he will pay Class 1 NIC of: £ First £110 Nil £285-£110= £175 @ 11% 19.25 £ 19.25 Roger's wife stopped working but to keep up her entitlement to a basic state pension, she pays voluntary Class 3 contributions of £12.05 a week.

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