National Insurance: how it works, what it funds, and how it affects your state pension

National Insurance (NI) is the tax (though it’s not technically a tax in the strictest sense) paid by workers under state pension age to fund the UK’s benefits, most notable of which is the state pension.

NI is paid by workers who are 16 or over, earning at least £242 a week and under state pension age.  

Today the Chancellor Jeremy Hunt announced that the Class 1 National Insurance rate will drop from 10pc to 8pc from April 6 2024. This is paid by employees earning between £12,570 and £50,270. 

It follows the cut from 12pc to 10pc announced in the 2023 Autumn Statement, which came into effect on January 6 this year.

Combined, the two moves will save 27 million workers £900 on average.

Racking up enough National Insurance contributions (NICs) over your working life can be the difference between getting an extra £10,000 a year in government payments when you reach retirement.

Here, Telegraph Money explains what NICs cost, how to find out whether you have gaps in your record, and how to fill them.

What is National Insurance?

NI has been around since 1911. Introduced by Lloyd George, it was created to provide a national system of insurance to protect the poorest members of society from facing a loss of income as a result of sickness or unemployment. 

It’s changed a bit since then, but given payments also fund new style jobseeker’s allowance, maternity allowance and contribution-based employment and support allowance, some of its fundamental principles of helping those worse off are still in place today.

You are legally obliged to pay NICs once you are aged 16, in work and earning at least £242 a week. You’ll usually be issued with a NI number just before you turn 16. This is made up of two letters, six numbers and a final letter – and is unique to you. 

All sorts of people and bodies may need to know your NI number, such as HMRC, employers and pension providers, your local council, student finance agencies, banks, building societies and other financial services.

You will continue to pay contributions until you reach state pension age. After this, if you work for an employer, you no longer have to make payments even if you still have a job. If you work for yourself, you’ll stop paying NICs at the end of the tax year in which you reached state pension age.

The amount you pay depends on how much you earn; the type of contribution – known as the “class” – you pay depends on whether you work for an employer or for yourself.

Forthcoming changes aside, NI has been tinkered with frequently over the past few years. 

Boris Johnson’s government decided to raise NI by 1.25 percentage points in April 2022 to fund health and social care. The rate was due to return to 2021-22 levels in April 2023, when a separate new 1.25pc Health and Social Care Levy was due to take effect.

Kwasi Kwarteng, briefly chancellor, reversed the rise in the September 2022 “mini Budget” and cancelled the planned introduction of the levy. 

At one point there was also a plan to make pensioners pay NI but this was dropped.

Classes of National Insurance

There are four main classes of NICs, which are split up like this:

• Class 1 NICs are paid by employees who earn over a certain income threshold
• Class 2 is a flat weekly rate paid by self-employed individuals with profits over a certain threshold
• Class 3 contributions are voluntary contributions paid by those wanting to plug the gaps in their NI record, so they can qualify for certain benefits, such as the state pension
• Class 4 NICs are paid by self-employed workers, depending on their profits.

From April 6 2024, Class 2 NI will be abolished. This was announced in the 2023 Autumn Statement.

National Insurance contributions: how much you pay

Employees Class 1 contributions

As an employee, you pay NI contributions when you earn more than the “primary threshold”. This changes over time, but at the moment, it is £242 a week (£12,570 a year).

Currently, you will pay Class 1 NICs of 10pc on income between £242 and £967 a week (or between £12,570 and £50,270 a year). You then pay contributions of 2pc on any earnings over £967 per week (or £50,270 a year).

From April 2024, you’ll pay 8pc over the primary threshold. The rate on earnings over the secondary threshold remains unchanged.

If your weekly income is below the £242 per week (or £12,570 a year) primary threshold, but above £123 (the “lower earnings limit”), you won’t pay NI. However, you will still get the benefits of paying, such as qualifying years for the state pension.

If you earn less than £123 per week, you don’t need to pay anything. But you will have a gap in your contributions record unless you qualify for NI credits, allocated when you claim things like child benefit or Statutory Sick Pay. More on this later. 

Self-employed Class 2 and 4 contributions

If you work for yourself, you pay NI when you make more than £12,570 a year in profit.

Currently, you might make two types of contribution: a Class 2 weekly flat rate of £3.45 per week, and a percentage Class 4 contribution, charged at 9pc on profits between £12,570 and £50,270, and 2pc on profits over £50,270. 

If your profits are less than £12,570 but more than £6,725 you’ll be treated as though you pay Class 2 contributions, but if profits are less than £6,725 you’d have to make voluntary Class 2 contributions to have NICs recorded.

From April 2024, there will be several changes.

Self-employed workers will no longer be required to make Class 2 contributions. 

Those with profits of more than £12,570 will come under the scope of Class 4 contributions, and will therefore continue to make NI contributions that way. 

If they’re making between £6,725 and £12,570 in profit, they will get NI credits without needing to make Class 2 NICs, so they’ll continue to accrue entitlement to the state pension. 

Those with profits below £6,725, and any others who pay Class 2 NICs voluntarily to receive contributory benefits like the state pension, can carry on doing so.

Additionally, from April 2024 the Class 4 rate will reduce to 6pc. Payment thresholds are due to stay the same.

What if I’m both employed and self-employed?

If you fall into both working categories, you need to pay both Class 1 NI on your employed income and you may have to pay Class 2 (until April 2024) and Class 4 NIC for your self-employed work.

Voluntary Class 3 contributions

If you have gaps in your record, you might be able to make voluntary contributions to fill them.

For the 2023-24 tax year, the weekly Class 2 rate is £3.45, and the weekly Class 3 rate is £17.45.

National Insurance credits when you’re not working

NI credits are a means by which you can maintain your NI record when you’re not making NI contributions.

Becky O’Connor of PensionBee said: “If you take any time out of paid work, or don’t earn enough to qualify for the basic state pension, you need to look up whether you are eligible for NI credits.”

You might be eligible for credits if, say, you are unable to work due to illness, or because you are caring for someone.

Ms O’Connor added: “For example, parents taking time out of work to look after young children are eligible for credits for years when they aren’t working, but are still making a valued contribution to society.”

The type of credits you receive can vary. Those receiving child benefit (even if they end up paying it back in tax charges) should automatically receive Class 3 credits until their child reaches 12, while anyone who gets Carer’s Allowance, Maternity Allowance or Employment and Support Allowance will automatically receive Class 1 credits.

Alternatively, you can tick a box on the child benefit form saying that you would like the credits but not the child benefit itself.

Read more on boosting your state pension.

Changes for parents with unclaimed NI credits

For parents or carers, often women, who are seeking for missing years of NI credits after taking time out of work to care for children, it will soon be possible to make claims dating back many years.

The current limit for back-claims is three months, but the Government has announced it will extend that to six years. 

From April 2026 it will be possible to claim all the way back to 2013. 

The Government says this will be “closely based on child benefit eligibility criteria”, although it’s not necessary to have actually been registered for or claiming child benefit at the time to qualify. Secondary legislation is planned “as soon as possible.”

Ms O’Connor said: “This was a particularly important decision because many women were missing out on NI credits as a result of not claiming child benefit, which is the main method the Government uses for determining eligibility for credits.”

Laura Suter, head of personal finance at AJ Bell said: “As this would leave you short of the full 35 years of credits you’d need to be entitled to the full state pension, that would equate to £3,634 a year in state pension you’d miss out on. Allowing parents to go back and fill in gaps on their record will help to boost the collective wealth of women when they retire.”

How National Insurance affects your benefits

Paying NI contributions provides the right to access certain contributory benefits, which you might need if you’re ever out of work, or when you reach retirement age.

This includes the new style Jobseeker’s Allowance, Maternity Allowance and – perhaps most notably – the state pension.

Ms O’Connor said: “The amount of state pension you get basically depends on the number of ‘qualifying years’ of contributions you have. To qualify for the new state pension you need to have made 35 years’ of NI contributions. To get any state pension at all, you need to have at least 10 qualifying years of contributions.”

Not all benefits depend on NICs – so your contributions won’t have a bearing if you claim the likes of Universal Credit, attendance allowance, disability allowance and child benefit.

How to check your National Insurance record

You can check your NI record for free on the Government website: https://www.gov.uk/check-national-insurance-record. You can also check by logging into your personal tax account online, or by writing to HM Revenue and Customs to request a statement at this address: 

National Insurance contributions and Employers Office

HM Revenue and Customs

BX9 1AN

You should be able to see the record of payments you have made, or which credits you have received, as well as which class of contributions. You can also find out if there are any gaps, and whether it’s possible for you to pay voluntary contributions in order to plug those gaps.

If you want to know what your state pension forecast looks like, you can check here: https://www.gov.uk/check-state-pension.

This article is kept updated with the latest information.