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National Insurance Payments: How is the money used?

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I remember clearly the day that I got my National Insurance card. This is probably showing my age, I’m not even sure that they even issue them anymore! When my little card detailing my National Insurance number arrived in the post it was like a milestone of growing up. Plus I still have it to this day!

Your HMRC identity

In reality your National Insurance number is your official identity, because it’s the number by which all National Insurance and tax payments by you are recorded and is your personal reference number for the HMRC system. Unlike names and statuses that may change when you marry,  your National Insurance number is your identity for life.

Where does the money go?

We all know we have to have a National Insurance number, and we all see National Insurance payments disappearing from our wage slips or by direct debit for the self employed among us– but what exactly does the money cover?

Paying National Insurance builds up your entitlement to various state benefits, these include the State Pension, Jobseeker’s Allowance or Bereavement Allowance with contributions varying depending on how much you earn and what your employment status is – and that applies to you if you are employed or self employed.

Employees

For employed staff, you pay Class 1 National Insurance contributions, these are deducted automatically by your employer from your wage. For those employees earning between £149 and £797 per week, the National Insurance rate paid is 12% of the amount between those boundaries. If you earn in excess of the latter limit then you pay an additional 2% on the earnings that exceed the £797 threshold. If you are a member of your employer’s contracted out pension scheme you will pay a lower rate.

National Insurance Numbers

Self Employed

For self employed people the rules are rather different asyou pay two different rates of National Insurance contributions –identified as Class 2 and Class 4. The Class 2 contributions are at a flat rate of £2.70 per week, they are due on 31 January and 31 July – also the same dates that tax and tax payments on account are due. They can be either paid in a lump sum on those two dates, or on a monthly basis by direct debit or standing order.

In addition the self employed also pay Class 4 contributions which are worked out as a percentage of their annual taxable profits. This equates to 9% for profits in excess of £7,775, but less than £41,450 and a further 2% is payable for profits above that limit. These are also paid at the same time that you pay your personal tax bill either in July or January.

You can pay Class 3 voluntarily too

But, you can also choose to pay a third class of National Insurance contributions voluntarily. The Class 3 contributions are paid at a flat rate of £13.55 and can be used paid monthly or quarterly, this is to fill in gaps in your National Insurance contributions to maintain validity for the benefits mentioned above. Class 3 National Insurance contributions can be paid if you aren’t working or if you are claiming state benefits, and also if you live abroad but want to maintain your state benefits entitlement in the UK.

HMRC keep National Insurance records

HMRC keeps a record of your National Insurance contributions throughout your life and these can be checked at any point with the HMRC by requesting a statement for the relevant time period that you require. This can either be done online, or by telephone to request a paper version. You cannot however get a statement for either the current tax year or the previous tax year.

When do you stop paying National Insurance?

National Insurance contributions are also with you for life, they are paid your entire working life until you reach State Pension age.

Employees:

If you are employed you stop making the payments as soon as you hit State Pension age.

Self Employed:

If you are self employed you stop paying Class 2 contributions at State Pension age, and then stop paying the Class 4 contributions from the start of the tax year after the one in which you have reached State Pension age.

Forthcoming changes to pensions and National Insurance

For men this is 65 for those born before 6 December 1953 and 60 for women born before 6 April 1950. However the latter will increase and reach 65 in November 2018 from which time the State Pension age – and therefore the time a worker is paying National Insurance – will rise to 66 by October 2020 for both sexes.

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About Liz Morrell

About Liz Morrell

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