Income tax explained National insurance and tax

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National insurance takes a further slice of earnings. 

National Insurance is essentially tax by another name. It is a charge on earnings and self-employed profits.

Making National Insurance contributions entitles you to certain state benefits, including state pension. If you pay income tax through Pay as You Earn (PAYE), they'll be deducted at the same time. 

Full state pension is only paid to those who have an adequate National Insurance contributions record. Currently, this is 30 years of contributions. In April 2016, the requirement rises to 35 years.

This guide explains the basics of National Insurance and how much you can expect to pay. 

How much National Insurance you pay

The type of National Insurance contributions you will pay depends on your employment status.

Go further: National Insurance explained - read our extensive guide to find out much more about National Insurance

Class 1 (Employed)

You pay Class 1 contributions on your salary or wage, commission, bonuses and overtime, as well as on sick pay and maternity, paternity and adoption pay from an employer.

National Insurance is calculated on gross earnings above the earnings threshold. 

  • For 2016-17 this is £155 a week or £8, 060 a year
  • If you earn above the threshold you pay 12% of your earnings between £8,060 and £43,000 as Class 1 contributions.
  • On any taxable earnings above £827 a week you pay National Insurance at 2%.

Class 2 (Self-employed)

If you're self-employed, you pay Class 2 contributions.

  • If your profits are less than £5,965 in 2016-17 – you can elect not to pay National insurance
  • For any year you don't, you won’t build up benefit entitlement.
  • Class 2 contributions are £2.80 a week in 2016-17.

Find out more: Tax for the self-employed - key points to consider 

Class 4 (Self-employed)

If you're self-employed, you must additionally pay Class 4 contributions once your profits reach a certain limit.

  • In 2015-16, you must pay 9% of taxable profits between £8,060 and £43,000, and 2% of profits above that.

Class 3 (Voluntary)

These are voluntary contributions that count towards your total NIC record. The weekly rate for 2016-17 is £14.10.

You can pay them only if: 

  • you're not working; 
  • you're not liable for, or you're exempt from, Class 1 or Class 2 NICs; 
  • your contributions for a specific year aren't enough to count towards state pension entitlement; 
  • or you live abroad.

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