National insurance: who pays it and what is it for?

National insurance made up 18% of the UK government’s 2023-24 tax take, the biggest share after income tax (28%). Those above the age of 16 and below their retirement age (67 for most people) who earn more than a certain amount or who have profits of more than a certain amount from self-employment pay national insurance, as do in almost all cases employers.

Unlike other taxes, national insurance (NI) has a contributory element, in that paying it creates eligibility for benefits, in particular the state pension. This principle dates back to its foundation in the early 20th century, which is explored briefly at the end of the article.

What national insurance pays for

The benefits that are funded out of NI include:

• state pension
• maternity allowance
• jobseeker’s allowance

However, to receive the full state pension you will need to have contributed for at least 35 years and to get any pension you will need at least 10 years of contributions. You can check your national insurance record on the gov.uk website.

National insurance rates for the employed

There are three rates of national insurance for people in employment.

• Weekly earnings of up to £242 (£12,584 a year) are exempt from national insurance.
• A rate of 8% is payable on weekly earnings of £242.01 to £967 (up to £50,284 a year).
• Earnings of more than £967 a week are on a 2% rate.

Example:
Someone on a salary of £1,000 a week would pay:

• zero on the first £242
• 8% (£58) on the next £725
• 2% (66p) on the next £33

This equals £58.66 a week or £3,050 a year. National insurance is automatically deducted from pay along with income tax.

The four classes of national insurance

People’s employment status affects what sort of NI they pay.

• Class 1 is paid by company employees
• Class 2 is paid voluntarily by sole traders whose profits are less than £6,725 a year at a rate of £3.45
• Class 3 is for people with gaps in their NI record (e.g. raising children); current rate is £17.75 a week
• Class 4 is paid by self-employed people

National insurance rates for the self-employed

Annual profits / Type / Contribution rates:

• £0 to £6,844 — Class 2 — £3.50 a week (voluntary)
• £6,845 to £12,569 — Class 2 — £0 a week (NI record still protected)
• £12,570 to £50,270 — Class 4 — 6% of profits between £12,570 and £50,270
• Over £50,270 — Class 4 — 2% of profits above £50,270

Example (Profits of £55,000):

• nothing on the first £12,569
• 6% on the next £37,701
• 2% on the final £4,730

Self-employed people pay NI as part of their self assessment tax return.

National insurance credits

People who are unable to work usually get Class 1 national insurance credits. These ensure that they still get access to important state benefits. Credits are typically received by:

• people looking for work
• people unable to work due to illness or disability
• carers
• those on maternity, paternity or adoption pay

People on universal credit get Class 3 credits automatically.

Voluntary contributions

Long periods of economic inactivity may mean some people need to top up their national insurance contributions to get full benefits.

This can be done by paying Class 3 voluntary contributions. If you are short in a given tax year, that entire year won’t count toward your pension.

Your NI record will show how much you need to top up to receive your full state pension entitlement.

You can top up NICs for up to six years ago.

State pension

This is the most important benefit paid for out of national insurance.

For the 2025–26 tax year:

• Full rate: £230.25 a week (£997.75/month, £11,973/year)
• Minimum (just over 10 years): £65.79 a week (£285/month, £3,421/year)

Those who have paid between 11 and 35 years will receive amounts on a sliding scale.

National insurance and child benefit

Parents receiving child benefit are also given NI credits. If they also work, they may have excess credits. These can be transferred to a partner who is not working or earning too little to pay NI.

Transfers are made annually at the end of the tax year.

Employer’s national insurance

This is paid at a different rate from employees.

From April 2025:

• 15% of employee earnings above £5,000
• Previously 13.8% above £9,100

This is offset by the employment allowance:

• From April 2025: £10,500
• Previously: £5,000

Eligible employers reduce their Class 1 NI payments throughout the year until the allowance is used up.

Despite this, many employers have faced higher costs due to the NI rise and the increase in the minimum wage.

When did national insurance begin?

The National Insurance Act of 1911 introduced the UK system after a royal commission on the poor laws.

Originally, contributions funded:

• health benefits: 4d from men + 3d from employers = 10s a week for 6 months
• unemployment benefits: 2.5d each from workers and employers = 7s a week for 15 weeks

The post-war Labour government expanded NI to include pensions and other benefits.

Today, around 95% of National Insurance Fund payments go toward the state pension (£110 billion annually).

Though the original hypothecated purpose has weakened, the contributory principle remains—which distinguishes NI from general taxation.

Employers must be aware of their obligations, which can also apply to individuals hiring domestic workers like cleaners or childminders.

For advice on calculating and paying national insurance, or other tax or business issues, please contact Finsbury Robinson. We are a full-service tax, accountancy and business advisory firm, and our friendly and highly experienced team is available on 020 8858 4303 or via email at info@finsburyrobinson.co.uk