When you open up your payslip excited about the tons of money you have made this month you may notice a few things. The first one is tax, something that you probably already know far too much about. The second will be NI or National Insurance. What exactly is national insurance? What is it used for? And how does it affect your salary?
What is National Insurance?
All of those who earn over a certain amount must make National Insurance Contributions (NIC) and this has been the way of the UK for a pretty long time. The HMRC have a special branch named the National Insurance Contributions Office (NICO) which keeps track of your earnings throughout your entire life using your National Insurance number. They know exactly how much you have earned and how much of that you have paid back to them in contributions. Sounds pretty creepy, but it is also very necessary!
If you are under 16, or over state pension age then you will not have to pay national insurance. Similarly, if you are not earning over the limit for the current tax year, then you can avoid paying national insurance contributions. Every April (the beginning of the tax year) the rates will change depending on what the government have set.
What is National Insurance used for?
All national insurance contributions are paid into the social security fund, which then entitle you and others to a range of benefits. These benefits could be something such as maternity allowance from the government, incapacity benefit and Jobseekers allowance (contribution based). The main benefit you are likely to see from your NIC will be your state pension when you reach the official state pension age. Depending on how much you pay in throughout your working life, you will then be entitled to a percentage of that back when you retire.
If, in these tough economic times, you lose your job, you will be entitled to contribution based Jobseekers allowance which will help you until you are back in work. Incapacity benefit is for those who cannot work through illness or disability and maternity allowance is for those who are expecting a baby.
How does National Insurance affect your salary?
When you begin a new job, you may notice that your employer asks for your National Insurance number. This will then be put into the system and your details will be logged with the HMRC. You will find that NICs are deducted directly from your payslip without you having to do anything.
There are four classes of NIC which are dependent on how much you earn and whether you wish to top up your contributions (such as for a higher state pension). If you are unsure as to which class you are paying, or what to find out more ask your employer. In most cases, it will be worth talking to HMRC or even an accountant to find out if what you are paying is correct and the effect it will have on your ongoing salary.
About the author
James Devie has been a chartered accountant for over a decade and writes on behalf of http://www.pricebailey.co.uk/. He appreciates that numbers and tax can confuse people at the best of times and so aims to be as informative as possible.