National Insurance – the Basic Facts

Most people over the age of 16 pay it in one form or another but it is still an element of the UK tax system which can cause huge confusion among employees, employers and the self -employed.

National Insurance is the “tax” that you pay in order to build up your entitlement to state benefits, including the state pension. Everyone is given a national insurance number when they reach the age of 16 and this is used as your account number for building up your entitlements.

Class 1 primary, class 1 secondary, class 1A, class 2, class 4 – what’s the difference and how do they affect you?

Put simply, if you are employed, you pay class 1 primary and your payments should be taken care of by your payroll provider and will be detailed on your payslip, providing that you are earning over £149 per week. Your employer will also then pay class 1 secondary on top of your contributions.

If you are self-employed it is slightly more complicated. The self-employed pay class 2 and class 4. Class 2 payments need to be paid directly by the self-employed person, usually by a weekly direct debit. In order to sign up for this you need to send a form (CA5601) to HMRC to tell them that you are self-employed and want to start making payments.

You then also need to pay class 4 national insurance via your self-assessment tax return,. This is a percentage of your taxable profits (9% in the 2012/13 tax year). HMRC will collect this payment as part of your annual tax bill.

When you reach state pension age you should stop paying all national insurance. If you are employed this will stop automatically. If you are self-employed, class 2 payments will stop either at state pension age or up to 4 months after if any contributions owed. Class 4 will stop from the start of the tax year after the one in which you reach state pension age.

That’s it. Nothing more complicated than that.

If you have recently become self-employed, National Insurance is just one of the many things you need to organise to ensure your tax responsibilities are taken care of. If you would like any more information on this and related facts about self-employment, give us a call on 0131 556 8595 for more information.

Ricky Steedman