Start-Up Guide (10) – An overview of National Insurance (NI)

When Lloyd George’s Liberal government first introduced National Insurance (NI) payments in 1911, the aim was to provide a safety net for workers who fell on hard times.

The scheme took money out of workers’ wages, and in return, they could get money from the government to pay for medical treatment, or if they lost their job.

In the intervening 100 years, much has changed. The various classes, thresholds and limits have expanded over the years to make the rules regarding National Insurance contributions absurdly complex.

Here’s a brief overview of the various national insurance contributions. Check the latest NIC rates here.

What classes of NI are there?

Class 1

This will apply if you run a limited company and take a salary as an employee. It’s the most common form of NI and is calculated as a percentage of your wages, up to an upper earnings limit.

The primary contribution is paid by the employee, the secondary by the employer. For 2020/21, the employee rate is 12% on earnings between £183 and £962 a week and 2% above £962 per week.

Employers must also contribute 13.8% on earnings above the secondary threshold, which is set at £169 per week for 2020/21.

Class 2

This is the compulsory rate paid by self-employed people. However, you are exempt should your wages be below a certain level. This applies to sole traders and those in a partnership from the first day of self-employment. These contributions are currently £3.05 per week (2020/21).

Class 3

Voluntary Contributions. Pay these to help fill gaps left in your NI contribution record, such as periods of unemployment. As is done with pensions, HMRC may contact you to make you aware of any gaps.

Class 4

Like Class 2, but only for the self-employed with profits over a certain amount each year. The rate for 2020/21 is 9% of all earnings between £9,500 and £50,000 per year and 2% on annual profits above £50,000

National Insurance contributions are generally payable no later than the 19th of each month, unless the payments due are very low, in which case you may be able to pay quarterly.

We strongly advise you to consult with your accountant and let them handle this area for you.

On to ByteStart’s Start-Up Guide – Part 11 – How to select the right business bank account
Back to ByteStart’s Start-Up Guide Index

Last updated - 11th October, 2019

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