National Insurance accounts for a large part of the tax you pay on your income. Yet, many people don't actually know why it is different from income tax and how it is exactly calculated.
National Insurance is a very important part of the UK welfare state 🇬🇧
National Insurance was first introduced in 1911 to fund unemployment and health benefits to workers. Over time, National Insurance became more complicated. UK contributions finance many of the services that the government provide. These include; maternity allowances, unemployment benefits, and the state pension.
Like income tax, National Insurance is mandatory in the UK if you're 16 years or older and you earn over a certain level of income:
Unlike income tax, you stop paying National Insurance after you retire at the state pension age (which currently is 66 years old).
There are 4 different classes of National Insurance: Class 1, Class 2, Class 3, and Class 4 National Insurance.
Each class of National Insurance has a different application:
It's very unlikely to see someone pay all 4 types of National Insurance.
Like income tax, Class 1 and Class 4 National Insurance are calculated in bands and as a percentage of your income.
For Class 1 as an employee, you pay:
For Class 4, from your self-employed profits, you pay:
Class 2 is different as it is based on the number of weeks you've worked on your Self Employed business.
If you start earning money through a side hustle, small business or as a sole trader, you will need to consider whether you need to pay different classes of National Insurance. It gets even more complicated if you earn money as an employee and through self-employment – we'll cover this is another post!
Rather than opening up a spreadsheet and calculating everything yourself, you can use earnr to do all the calculations for you. This will free up your time so you can focus on the thit really matter for your business.