What is National Insurance? A Guide for UK Taxpayers
National Insurance (NI) plays a vital role in the UK’s tax system, acting as a primary source of funding for a range of state-provided benefits, including the state pension, sick pay, and unemployment support. It is a mandatory contribution for individuals who are either employed or self-employed, and it applies to those whose income exceeds a certain threshold. This post aims to provide a detailed understanding of National Insurance, covering its purpose, the rates at which contributions are calculated, and the impact it has on your entitlement to state benefits and retirement planning. Whether you are a salaried employee or running your own business, it is essential to understand how NI works to effectively manage your finances and plan for the future.
What is National Insurance?
National Insurance (NI) is a tax levied on earnings and self-employed profits, with contributions collected by the UK government to fund a variety of essential state benefits. These contributions provide a safety net for individuals, helping to support them during periods of retirement, illness, or unemployment. The key areas funded by National Insurance include:
- The State Pension
- Maternity Allowance
- Unemployment Benefits (e.g., Jobseeker’s Allowance)
- Sick Pay and Disability Benefits
- The National Health Service (NHS), which is partially funded through NI contributions
In essence, NI serves as a cornerstone of financial security for UK citizens, offering crucial support during times of need, such as retirement, sickness, or unemployment.
Who Pays National Insurance?
NI contributions are mandatory for individuals who meet specific criteria based on their employment status and earnings. You are required to pay National Insurance if you:
- Are employed and earn above £242 per week (2025/26 threshold)
- Are self-employed and generate a profit exceeding £12,570 per year
- Are aged 16 or over but below the State Pension age
For employees, National Insurance contributions are automatically deducted from your salary through the Pay As You Earn (PAYE) system. Self-employed individuals, on the other hand, pay their contributions through the Self Assessment tax return process.
Employees
As an employee, you are required to pay Class 1 National Insurance Contributions (NICs), which are automatically deducted from your salary. The rate at which you contribute depends on your weekly earnings. For the tax year 2025/26, the contribution rates are as follows:
- Earnings up to £242 per week: 0%
- Earnings between £242 and £967 per week: 8%
- Earnings above £967 per week: 2%
In addition to the contributions you make, your employer is also obligated to pay NI contributions on top of your salary.
For Self-Employed Individuals
Self-employed individuals are required to pay both Class 2 and Class 4 National Insurance Contributions (NICs) based on their annual profits. The rates for the 2025/26 tax year are as follows:
Annual Trading Profits | Class of National Insurance | Contribution rates (2025/26 tax year) |
£0 to £6,844 | Class 2 | £3.50 per week, but this is voluntary |
£6,845 to £12,569 | Class 2 | £0 per week – you don’t need to pay but are counted as making Class 2 contributions to protect your NI record |
£12,570 to £50,270 | Class 4 | 6% of profits between £12,570-£50,270 |
Over £50,270 | Class 4 | 6% of profits between £12,570-£50,270 and 2% of profits above this |
Class 2 NICs are essential for qualifying for the State Pension and other benefits, whereas Class 4 NICs are calculated based on the level of your profits.
