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National Insurance Contributions

how are national insurance contributions calculated

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Most people who work have to pay National Insurance contributions. National insurance is not payable by individuals below age 16 or above State Pension age.

National Insurance contributions are payable to the Income Tax Division of the Treasury. See rates and thresholds .

There are four classes of contributions and in the course of a person's working life they may need to change from one class to another or pay more than one class at a time.

The level of a person's contribution and the rules regarding payment depend on the Class of contribution they pay which may be determined by the type of employment they are engaged in.

  • Class 1 - Paid by employed earners and their employers
  • Class 2 - Paid by self-employed earners
  • Class 3 - Paid voluntarily by persons not liable for any other Class of contribution
  • Class 4 - Paid in addition to Class 2 contributions by self-employed people whose profits are above certain level (set annually)

Class 1, 2, and 3 contributions count towards entitlement to some social security benefits. Class 4 contributions do not.

Earnings factors

For a tax year to qualify for contributory benefit purposes, an insured person must pay sufficient contributions at either the Class 1, 2 or 3 rate to achieve the required Earnings Factor set each year, or to have had earnings from employed earner's employment at least equivalent to the lower earnings limit (LEL) which is set each year, even though contributions have not been paid on those earnings.

An earnings factor is a figure which represents the amount of earnings on which contributions have been paid or treated as paid.

Whilst employed earners actually start paying National Insurance contributions once their earnings exceed the primary earnings threshold set for that tax year if their earnings reach the annual lower earnings limit they are treated as if they had paid contributions at 0% on any earnings they have up to the primary earnings threshold. Earnings on which contributions are paid at that zero rate count towards a person's entitlement to contributory benefits, such as Jobseeker's Allowance or Incapacity Benefit. This protects the National Insurance records of low-paid earners.

Payment of National Insurance Contributions

Employed earners' Class 1 primary contributions are collected by their employer who deducts the appropriate amount from their pay. The employer then pays this to the Income Tax Division of the Treasury.

Deduction amounts have been put into tables for the relevant years for ease of reference, these can be found in Downloadable documents. Table letters refer to the different criteria regarding the person liable to pay, please find these listed below.

• A – Standard rate, not contracted out

• J – Deferred rate, not contracted out (must hold a Certificate of Deferment for the year/employee)

• B – Married Woman's reduced rate (must have a Certificate of Election and women must have been signed up pre-1977)

• C – Over State Pension age – employer only contributions (should hold a Certificate of Age Exception for the employee)

• D – Contracted out (salary related)

– usually big employers like government, banks etc

• E – Contracted out, Married Woman's reduced rate (must have a Certificate of Election and women must have been signed up pre-1977)

• L – Contracted out, Deferred rate (must hold a Certificate of Deferment for the year/employee)

N.B. Contracted Out means contracted out of the Additional State Pension, where a person is a member of an approved employer pension scheme. Not Contracted Out means contracted in to the Additional State Pension for contribution purposes. Where employees are 'Contracted Out' we will need to know the Employer Contracted Out Number (ECON) and Scheme Contracted Out Number (SCON) on the end of year return for them (this information should be available from your pension scheme provider).

Where a person has multiple employments, or employment and self-employment, and expects to pay National Insurance contributions on earnings in one employment (for the whole year) at the Upper Earnings Limit (to check the Upper Earnings Limit see the rates and thresholds link above in 'General' information), some National Insurance contributions may be deferred until an end of year review.

See the above downloadable documents for National Insurance forms or the self-employed forms section for Income Tax and National Insurance forms.

National Insurance forms relating to self-employment are listed below:

  • an application form to register for self-employment
  • an application form to pay Class 2 contributions by Direct Debit
  • an application form for Small Earnings Exception from payment of self-employed contributions
  • an application form for deferment of self-employed contributions
  • a form to notify cessation of self-employment

To count for benefit purposes, contributions must be paid within strict time limits. There is also a time penalty if contributions required for a particular benefit claim are not paid until the time of that claim.

National Insurance Credits

To the extent necessary to make up a qualifying year, National Insurance credits can be awarded to you if you are -

  • Claiming Jobseeker's Allowance (Class 1 credit)
  • Claiming Incapacity Benefit (Class 1 credit)
  • Claiming Maternity Allowance (Class 1 credit)
  • Claiming Adoption Allowance (Class 1 credit)
  • Claiming Child Benefit for a child under the age of 12 (Class 3 credit)
  • Claiming Carer's Allowance (Class 3 credit)
  • Claiming Employed Person's Allowance/Disabled worker (Class 1 credit)
  • Claiming Employed Person's Allowance/Non-Disabled worker (Class 3 credit)
  • A man approaching age 65 - from 6 April 2010, these credits are being phased out in line with the increase in women's State Pension age (Class 1 credit)
  • On an approved training course (Class1 credit)
  • Required to attend jury service and did not have earnings at or exceeding the Lower Earnings Limit from employed earner's employment (Class 1 credit)
  • Approved foster parents (Class 3 credit)
  • A person caring for a child under the age of 12 (but not receiving child benefit) who has a certain type of relationship to the child e.g. grandparent, from 6 April 2012 (Class 3 credit)

Class 1 credits count towards the same social security benefits as Class 1 National Insurance contributions and Class 3 credits towards the same social security benefits as Class 3 National Insurance contributions.

Contributory benefits

The Class of National Insurance contributions paid affects the benefits a person may be entitled to.

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