Debitoor Dictionary

Accounting terms explained in a simple way

Over 150 Articles for Founders and Entrepreneurs

  1. Expense
  2. PAYE
  3. Payroll
  4. Profit & Loss Statement
  5. Self Assessment
  6. Tax Codes

National Insurance – What is National Insurance?

National Insurance is a tax paid by workers in the UK. National Insurance contributions go towards certain benefits such as the State Pension, Jobseeker’s Allowance and Maternity Allowance.

Are you an entreprenuer, freelancer or self-employed? Read more about how Debitoor accounting and invoicing software gives you the tools to stay on top your taxes.

To pay National Insurance, you must be aged 16 or over, and either:

  • an employee earning more than £157 a week.
  • self-employed with a profit of £6,025 or more per year.

There four different classes of National Insurance, which all pay different rates. Three of the classes are based on whether you are employed by someone else or if you are self-employed. The fourth class is for voluntary contributions.

National Insurance for Employees

If you are employed by someone else, you will make Class 1 National Insurance Contributions. For the 2017-2018 tax year, Class 1 National Insurance is charged at:

  • 0% on weekly earnings below £157
  • 12% on weekly earnings between £157 and £866
  • 2% on weekly earnings above £866

For example, if you earned £120 per week, your weekly income would be below the £157 threshold, so you would pay no National Insurance.

If you earned £500 a week, you would pay nothing on the first £157 of your earnings, and 12% on the next £343 (£41.16). You would pay a weekly total of £41.16.

If you earned £1,000 a week, you would pay nothing on the first £157 of your earnings, 12% on the next £709 (£80.60), and 2% next £134 (£3.40). You would pay a weekly total of £84.

As an employee, you do not need to do anything to make your National Insurance Contributions – your employer will automatically deduct this from your wages, and the amount you pay will be shown on your payslip.

If you think you have been overcharged, you can claim a National Insurance refund from HMRC.

National Insurance for the Self-Employed

There are two classes of National Insurance for the self-employed, the class you fit into depends on your profits. To work out how much profit you make, deduct your expenses from your self-employed income.

Class 2 is for those with an annual profit of £6,025 or more a year. Class 2 National Insurance is charged at a set rate of £2.85 a week.

Class 4 is for those with an annual profit of £8,164 or more a year. If you are in Class 4, you will pay:

  • 9% on profits between £8,164 and £45,000.
  • 2% on profits over £45,000.

For example, if your profit was £30,000 a year, you would pay nothing on the first £8,164, then 9% on the next £21,836 (£1,965.24). You would pay an annual total of £1,965.24.

If your profit was £60,000 a year you would pay nothing on the first £8,164, then 9% on the next £36,836 (£3,315.24) and 2% on the next £5,000 (£100). You would pay an annual total of £3,415.24.

If you are self-employed, you will pay National Insurance through Self Assessment.