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?
We also look at some specific NIC issues:
Home responsibilities protection
Part time workers on a low income
Married women paying reduced rate contributions
Salary sacrifice, low earnings and NICs
- 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 (NINO) 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.
Back to the top
- 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.
- HMRC has now stopped issuing replacement National Insurance number cards but will still provide you with written confirmation of your National Insurance number if you ask for it.
- However, if you have recently applied for a National Insurance number or are approaching age 16 and are eligible to receive a number automatically you will still be sent a National Insurance number card. This will continue for some time.
- You do not need to have a National Insurance number card; it is your number that is important.
- The card is not proof of identity or of a right to work in the UK.
Back to the top
- 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 2011/12 this limit is £139 a week. State benefit entitlement begins where your wage is over £102 per week. Use the link for more information.
- You can see to work out your own NIC in the example Anya.
Back to the top
- 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 (£42,475 for 2011/12) 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 2011/12 the weekly rates of Class 1 NIC for employees are as follows:
| On first £139 | Nil | | | On income between £139 to £817 | 12% | | | On amount above £817 | 2% | |
- You can see to work out your own Class 1 NIC using the examples Karim and Roger.
- You may come across Class 1A and 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 HMRC.
Back to the top
- Unless you are a director of a company, each employment you have is looked at separately and each has the weekly £139 lower limit.
If, in the 2011/12 tax year you have two jobs, and expect to pay Class 1 NICs on weekly earnings of at least £817, 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.
Back to the top
- 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 for the year as a whole, this is £42,475 for 2011/12 but it is broken down as £817 per week.
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.
Back to the top
- 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.
- Use the link 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 2011/12 the rate is £12.60 a week.
- You can see how voluntary contributions work in the example Roger.
- 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.
Back to the top
- 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:
| Benefit | Class 1 | Class 3 | | Bereavement allowance/bereavement payment | Yes | Yes | | Contribution based jobseekers allowance | Yes | No | | Incapacity benefit/employment support allowance | Yes | No | | Widow's benefits | Yes | Yes | | Basic state pension | Yes | Yes | | Additional state pension | Yes | No | |
Back to the top
- 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.
Back to the top
| Anya - two jobs - NIC due 2011/12 Anya earns £159 a week from her job in a chemist's and a further £75 a week as a part time dental assistant. She will pay no NIC on the wages she gets from the dentist but she will have to pay NIC on the chemist wages. She will pay each week - £159 less the lower limit of £139 = £20 @ 12%, that is £2.40. This will be taken from her wages together with any income tax before Anya receives them. |
| Karim - working out NIC for 2011/12 Karim earns £12,428 per year (£239 a week) in his job as a milkman. Each week he will pay Class 1 NIC of: |
| £ |
| First £139 | Nil |
| £239-£139 = £100 @ 12% | 12.00 |
| £12.00 |
| |
| Roger - working out NIC - voluntary contributions 2011/12 Roger has a job with the local bank. He earns £16,328 a year (£314 a week). Each week he will pay Class 1 NIC of: |
| £ |
| First £139 | 21.00 |
| £314-£139= £175 @ 12% | £21.00 |
| Roger's wife stopped working but to keep up her entitlement to a basic state pension, she pays voluntary Class 3 contributions of £12.60 a week. |
Back to the top
HRP is not a benefit but a scheme which helps protect your state pension. HRP can help if you are not paying National Insurance contributions because you are not working, or your earnings are low because you are caring for a child, or a sick or disabled person.
Home Responsibilities Protection also helps protect bereavement benefits for your husband or wife or civil partner.
Depending on your circumstances, you may either qualify automatically for HRP or may have to apply for it.
Qualifying automatically for Home Responsibilities Protection
You should get Home Responsibilities Protection automatically if you are getting either:
- Child benefit in your name for a child under the age of 16 and you have given the Child Benefit Office their National Insurance number
- Income support and you do not need to register for work because you are caring for someone who is sick or disabled
- Income support
You should apply for Home Responsibilities Protection if you are either:
- regularly spending at least 35 hours a week looking after someone getting attendance allowance, disability living allowance at the middle or highest rate for personal care, or constant attendance allowance or;
- a registered foster carer throughout a full tax year and are not getting child benefit and are not in paid work, or do not earn enough in a tax year for it to count towards the basic state pension.
When working out your basic state pension, the number of years that you get Home Responsibilities Protection is taken away from the number of qualifying years needed to calculate your pension. But for a full basic state pension, Home Responsibilities Protection cannot reduce the number of qualifying years below 20.
You also build up additional state pension if you qualify for Home Responsibilities Protection because you either:
- get child benefit for a child under the age of six
- are looking after a sick or disabled person (including a child over the age of six)
Home Responsibilities Protection was replaced for people reaching State Pension age on or after 6 April 2010.
From 6 April 2010, parents and carers can build up qualifying years through new weekly credits for the basic state pension and additional state pension.
A parent or carer will get a credit for each week in which they:
- are getting child benefit for children aged under 12
- are an approved foster carer
- are caring for at least 20 hours a week for people who are getting attendance allowance, the middle-rate or highest-rate care component of disability living allowance, or constant attendance allowance, or the need for care has been certified.
Some of the detail around these changes is subject to further parliamentary approval.
There will be no limit to the credits awarded to parents and carers, as long as they meet the qualifying rules.
If you reach state pension age on or after 6 April 2010, complete tax years of Home Responsibilities Protection they have already built up before 2010 will be converted into qualifying years up to a maximum of 22 years.These qualifying years will also count towards bereavement benefits.
In the following circumstances you will not usually be eligible for HRP
If you are claiming carer's allowance
If you get carer's allowance you will automatically get National Insurance credits and will not usually need Home Responsibilities Protection.
Married women or widows
A married woman or widow cannot get Home Responsibilities Protection for any complete tax year if they have chosen either:
- to pay reduced rate Class 1 National Insurance contributions as an employee (commonly known as the small stamp). If you are a married woman who elected prior to April 1977 to pay reduced rate contributions - you are not entitled to HRP. Where you would otherwise be entitled to HRP, it may be worthwhile revoking the reduced rate election. Again, a pension forecast may assist you in reaching a decision or;
- not to pay Class 2 National Insurance contributions when self-employed
To claim Home Responsibilities Protection, you will need to contact your local Jobcentre Plus office to get leaflet: 'How to protect your state pension if you are looking after someone at home', and claim form CF411. There are guidance notes to accompany the form.
When filling in form CF411, a foster carer will need to give a letter from their local authority or the agency they work for that confirms they have been an approved foster carer throughout the full tax year.
The state second pension is earnings-related. From April 2002, qualifying for HRP because someone is getting child benefit for a child under the age of 6, or looking after a sick or disabled person (including a sick or disabled person over the age of 6) will build up entitlement to the state second pension. This is paid at the same time as basic state pension.
If you are claiming Home Responsibilities Protection for years they have spent caring for someone with a long-term illness or disability between April 1978 and April 2002, you can claim at any time up to state pension age.
For the tax years 2002/03 onwards, you must claim Home Responsibilities Protection within three years of the end of any tax year they spent caring for someone with a long-term illness or disability. For example, if you were caring for someone with a long-term illness or disability throughout the 2011/12 tax year, you must claim Home Responsibilities Protection before 5 April 2015.
You must notify the Pensions Service if:
- you go into hospital or someone they claim benefit for goes into hospital; or
- you go to live abroad; or
- if you or the person you care for go into a residential care or nursing home.
Do I still get HRP if I work for part of the year?
As HRP reduces the number of years needed to qualify for the full basic state pension it is awarded for complete tax years. HRP is either given for a complete tax year or not at all.
If you work during a tax year, the availability of HRP will depend on whether you have qualifying earnings for that year and whether the year is a qualifying year.
HRP is given to you if either you:
- do no work at all during the tax year; or
- do work, but do not earn enough to make the year a qualifying year.
If you work and have paid enough contributions to make the year a qualifying year, the contributions will count for that year ahead of any HRP entitlement and the year will be a qualifying year.
If you have worked for some of the year only, or have worked throughout the year and not earned sufficient for the year to be a qualifying year, HRP will be awarded instead. Contributions paid to create a qualifying year take priority over HRP.
Remember that HRP is not the same as a qualifying year. A certain number of qualifying years are still need to gain entitlement to the full basis state pension. A pension cannot be awarded on HRP alone.
So if some contributions have been paid for a year, in some circumstances, it may be worthwhile paying voluntary contributions to top up those paid so that the year becomes a qualifying year. Voluntary contributions (Class 3 NIC) are payable at a weekly rate of £12.60 for 2011/12. The HMRC website has a section on voluntary National Insurance contributions and is helpful in getting out the points for and against making voluntary contributions to boost your state pension entitlement.
A pension forecast (available by calling the Pension Service on 0845 3000 168) will help in making that decision. A pension forecast can also be obtained online. But bear in mind that HMRC's records may not always be accurate and it is worth keeping a record of your own contributions.
Back to the top
- National Insurance contributions (NICs) buy benefit and pension entitlement. If you earn less than the lower earnings limit for Class 1 National Insurance purposes - you pay no NICs and you will not be entitled to contributory benefits.
- For state pension purposes, a year only counts as a qualifying year if sufficient contributions are paid for that year. Earnings below the lower earnings limit will not generate a qualifying year. However, if you look after a child or disabled person, you may be awarded home responsibilities protection for that year.
- Where earnings reach the lower earnings limit (£102 per week for 2011/12), you fall within the National Insurance system. However, no contributions are physically payable until earnings reach the earnings threshold (£139 per week for 2011/12).
- This means that for earnings between the lower earnings limit and the earnings threshold (£102 but not less than £139 per week for 2011/12), you enjoy the benefits of the National Insurance system without the costs. Contributions are payable at an effective nil rate, but this buys entitlement to contributory benefits and the state pension.
| Example Lucy currently earns £70 per week from her part-time job. She currently pays no tax or National Insurance. Her employers offers her some additional hours. If she accepts the additional hours she will be paid £100 per week. She is worried that this will mean that she will have to pay National Insurance and the additional work will not be worthwhile. At present Lucy's earnings are below the lower earnings limit for National Insurance contributions. This means that she is not entitled to contributory pensions and will not be accruing qualifying years for state pension purposes. By increasing her hours, Lucy's earnings will rise above the lower earnings limit for National Insurance purposes. However, as her earnings are below the earnings threshold of £139 per week, her contributions are at the nil rate. This means she effectively gains entitlement to contributory benefits and potentially a qualifying a year for state pension purposes, without having to physically pay out anything in terms of National Insurance contributions. She is also not earning enough to pay any tax so she will be able to keep the whole of her £100 per week. However, if her earnings increase above the earnings threshold (currently £139 per week), she will have to start paying National Insurance contributions at 12% and PAYE tax (depending on her tax code) on the excess over £139 per week. |
- Therefore, if it is possible for you to work additional hours to bring earnings between the lower earnings limit and earnings threshold, this will be beneficial and will give you the benefits of the National Insurance system for no extra cost.
- It is worth bearing in mind that if you are claiming Working tax credit you are entitled to be paid maximum credit until your earnings rise above £6,420 a year, which is equivalent to just over £123 per week. Above that amount, your tax credit entitlement is progressively withdrawn by 41p for every £1 by which your earnings exceed £6,420 a year.
- Once earnings reach the earnings threshold, National Insurance contributions are payable on earnings above the earnings threshold at the main Class 1 NIC rate.
Back to the top
- A woman who married before 6 April 1977 could elect by 12 May 1977 to pay reduced rate Class 1 contributions. The reduced rate for 2011/12 where a valid election remains in force is 5.85%. The reduced rate applies on earnings between the earnings threshold and the upper earnings limit (for 2011/12, between £139 per week and £817 per week).
| Example Janet has a reduced rate election in force. In a particular week in 2011/12 she earns £539. She must pay Class 1 contributions of £23.40, being (£539 - £139) @ 5.85%. |
- In the event that you have a valid reduced rate election and earn more than the upper earnings limit, Class 1 contributions are payable on the excess at 1%. This is the normal rate applying on earnings above the earnings limit.
| Example Barbara has a reduced rate election in force. In a particular week in 2011/12 she earns £1,000. She pays Class 1 contributions of £43.32 made up of:
(£817 - £139) @ 5.85%
(£1,000 - £817) @ 2%
|
- If you are a woman with a valid reduced rate election and are self-employed, you do not need to pay Class 2 contributions. However, Class 4 contributions remain payable if your profits exceed the lower profits limit (£7,225 for 2011/12).
- As a woman you will lose the right to pay reduced rate contributions in the following circumstances:
- if you divorce (entitlement lost from the date of decree absolute);
- if your marriage is annulled; or
- if there have been two consecutive tax years since 1978 where you have neither paid, nor been treated as having paid, Class 1 contributions or been self-employed.
- The obligation to inform your employer that you are no longer entitled to pay reduced rate contributions on divorce falls on you. The relevant section of the certificate of election should be completed and sent to:
HMRC
National Insurance Contributions Office
Contributor Caseworker
Benton Park View
Newcastle upon Tyne
NE98 1ZZ
- If you are a woman paying reduced rate contributions, you are entitled to a basic state pension of 60% of your husband's entitlement based on his NIC record. As a woman you can claim your pension at the time your husband reaches 65 and claims his state pension and you reach state pension age yourself. The earliest you can claim your pension based on your husband's contributions is when your husband is 65 and you are 60.
- If you are a woman paying reduced rate contributions, you are also entitled to statutory maternity pay, statutory sick pay, statutory adoption pay and statutory paternity pay. These are earnings-related rather than contribution based.
- However, if you are paying reduced rate contributions, you are not entitled to any contributory benefit based on your own contributions, or to National Insurance credits (which offer protection of the NIC record to those out of work due to unemployment, illness and disability) nor to home responsibilities protection (HRP).
- This may be advantageous in certain circumstances:
- Revoking the election and paying standard rate contributions will create an entitlement to contributory benefits. These include incapacity benefit, and contribution-based jobseeker's allowance.
- Revoking the election and paying standard rate contributions may also enable you to obtain the basic state pension, and possibly the second state pension, in your own right. If you care for a child or sick or disabled person, it will also enable you to benefit from home responsibilities protection.
You can start to pay standard rate Class 1 NICs or Class 2 NICs from the beginning of the week after the form is received in the National Insurance Contributions Office or at the beginning of any later week that you request on the form. - If you make the change near the end of the tax year and you have not paid enough NICs for that year to count towards your basic state pension, you will have the choice to pay voluntary Class 3 NICs to make up the shortfall. You will not be able to pay voluntary Class 3 NICs for any tax year during the whole of which you have a valid reduced rate election.
- You need to bear in mind that once you have given up the right to pay reduced rate NICs, you cannot change back.
- Obtaining a pension forecast should assist you in making this decision (contact the Pension Service on 0845 3000 168) or you can obtain this online.
- If your earnings are between the lower earnings limit (£102 per week for 2011/12) and the earnings threshold (£139 per week for 2011/12), contributions are payable at the zero rate irrespective of whether there is an election in force. Revoking the election will cost you nothing in terms of additional NICs, yet will provide entitlement to contributory benefits, HRP and possibly a state pension.
- If you earn more than the earnings threshold, you will pay standard rate contributions of 12% on earnings between the earnings threshold and the upper earnings limit rather than reduced rate of 5.85%. Again, a pension forecast should help you decide whether this cost is worthwhile.
| Example Claudia has a reduced rate election in force. She earns £539 a week. She is thinking of revoking the election to increase her benefit and pension entitlement and wants to know how much extra NICs she will pay. With the election in force, she pays reduced rate contributions of £23.40 per week (5.85% of (£539 - £139)) on her earnings of £539. If she were to revoke the election she would pay standard rate contributions at 12% on earnings in excess of the earnings threshold, currently £139 per week. This means she would pay National Insurance contributions of £48 ((£539 - £139)@12%). Revoking the election would cost £24.60 per week (£48.00-23.40) or £1,279.20 a year) more in NICs. |
- Once the election is revoked, it cannot be reinstated. This means that the decision must be considered carefully before it is made as it cannot be reversed at a later date.
- To cancel the election, you must complete form CF9 and send it to the National Insurance Contributions Office (NICO) at the address above.
- Standard rate contributions ate payable from the start of the week after the form is received by NICO.
Back to the top
- No - salary sacrifice will not always be a good idea and there is one particularly unfavourable situation set out below but it can benefit you in some circumstances.
- Many employers offer a salary sacrifice scheme that enable an employee to swap cash salary for non-cash benefits. The idea is that the employee can save tax and NICs and will be in a better position overall than if he had merely purchased the benefit from the after tax salary.
- This can be particularly efficient where the benefit is exempt from tax and NICs although it is important to ensure that your tax credit entitlement is not reduced as a result - more information on this in the third bullet point below.
- Even if the benefit provided in exchange for the cash salary is not exempt from tax and NIC, the employee will normally save NICs. The cash salary will attract Class 1 contributions, whereas most benefits attract employer-only Class 1A, thereby saving the employee the primary Class 1 liability.
- Although this sounds attractive, the benefits for low earners are limited. If earners are between the lower earnings limit and the earnings threshold, switching from cash to benefit will not save NICs, as contributions in this band attract a nil rate.
- More dangerous is the scenario where the salary sacrifice reduces earnings below the lower earnings limit. This will take the employee out of the NIC net and in doing so will mean that the employee will lose entitlement to contributory benefits and the state pension. This is a particular worry if the pre-sacrifice salary was between the lower earnings limit and the NIC threshold where you would have been entitled to benefits as a result of your contributions without actually paying them.
| Example Kerry earns £159 per week. She has a child at nursery. He employer suggests a salary sacrifice scheme whereby she gives up cash salary for childcare vouchers as this will save her tax and NICs. At present, she pays National Insurance at the standard rate on earnings above £139 per week for 2011/12. This equates to contributions of £2.40 per week. If she exchanges £60 of cash salary for £60 of nursery vouchers each week, she will have cash earnings of only £99 per week. This will take her earnings below the lower earnings limit and outside the National Insurance system. This will adversely effect entitlement to contributory benefits, statutory maternity pay, statutory sick pay, statutory adoption pay and also her state pension entitlement. It would also reduce Kerry's entitlement to tax credits on her childcare costs, because you cannot claim tax credits on childcare costs which are funded by someone else (e.g. by your employer). She would therefore lose £48 in tax credits - 80% of the childcare costs of £60 - and gain only £2.40 NICs each week. |
Back to the top
