“National Insurance” is a sneaky form of tax that many overlook. It was first introduced in 1911 to support people who were unemployed, perhaps due to sickness. Several revisions have been made in the more than 100 years since its inception and it is an important form of tax whose payment rates affect how much state pension and other benefits workers receive. In this blog, intend to provide a brief guide to National Insurance. We will look at what National Insurance is, how much it is and a recent change that has been brought in to simplify the system.
Why do I pay two lots of National Insurance?
It’s not unusual for me to get a call from a concerned client as after receiving their tax bill, they realize they’re paying two types of National Insurance. Not only are they paying National Insurance throughout the year (either by monthly Direct Debit or every six months), their tax bill appears to also include National Insurance again. This is because self-employed pay two different types of National Insurance. There are different types of National Insurance, applicable in different circumstances, and the Revenue group these types into “classes”.
Employees pay Class 1 National Insurance, which is equal to 12% of their earnings above £155 (and 2% for earnings above £815 a week).
Self-employed people pay Class 4 National Insurance being 9% of their profits falling between £8,060 and £42,385. So if a self-employed person earns less than £8,060, there is no Class 4 National Insurance to pay, and if their earnings are above £42,385, they don’t pay any more National Insurance than someone earning £42,385.
A self-employed person pays Class 2 National Insurance if their earnings are above £5,965 a year. It is a set amount (no matter how much more than £5,965 per year someone earns) of £2.80 per week.
Class 3 National Insurance is voluntary for people who have gaps in their record. Entitlement to state benefits, such as state pension, is restricted if not enough National Insurance contributions have been made. Class 3 allows taxpayers to make up for any missed payments. To check if you have missing contributions, you can use the Revenue’s calculator at the following link:
Why haven’t the Revenue taken the Class 2 National Insurance direct debit for a while? Have they made a mistake?
The system of paying National Insurance via two separate methods – throughout the year and with your other tax – is not sensible and wastes time for everyone involved.
The Revenue are therefore changing the system so that from 6th April 2015, Class 2 National Insurance is to be paid along with your tax and Class 2 National Insurance. The payment due date will be January 2017.
The final Direct Debit collection will likely be in July 2015 as the Revenue collect Class 2 National Insurance in arrears – that is, they collect it three months late.
The previous method of paying Class 2 National Insurance relied on self-employed workers knowing what their yearly earnings would be. If the earnings unexpectedly rose above the Class 2 threshold, taxpayers could expect to receive a large demand from the Revenue for retrospective Class 2 contributions. This new method will prevent such underpayments arising.