When running payroll, employers use an employee’s National Insurance category letter to figure out how much they each need to contribute.
The majority of employees fall into category letter A, which implies they must pay standard Employee and Employer Class 1 National Insurance Contributions (NICs). On your payslip, you should be able to see your category letter.
Employees who do not have to pay NICs, for example because they are under the age of 16, fall under category letter X.
Our Tax Rates and Allowances sections detail the current National Insurance rates and thresholds.
What is PAYE and NI A on payslip?
Your payslip contains crucial information about how much you contribute to government spending; but, what do the statistics for Income Tax and National Insurance mean?
We count down the days till they arrive, plan how we’ll spend them, and calculate how long they’ll last, but do you actually know what you’re looking at when your payslip arrives?
We ponder the contents, and (if you’re like most of us), you’ll be humiliated by how little you know about the figures: PAYE, tax, National Insurance, and student loan repayments. The huge difficulty with not understanding is that you could be staring at a tangle of numbers for months on end without realizing there was a mistake! For example, you could be overpaying income tax or pension contributions.
Nobody wants to pay more than they have to; that would be ridiculous. So sit down with a cup of tea and spend a few minutes learning about the various deductions, where they go, and why you’re paying them. Then you can be confident that you know exactly what you’re looking at every month from now on it won’t make for happy reading, but you’ll feel a little better knowing you understand it.
If you’re employed, you’ll pay it through a system known as Pay As You Earn (PAYE), which I’m sure you’ve heard of.
PAYE is a system that collects your income tax and social security contributions. These contributions are deducted from your earnings and pension by your employer.
Instead than paying tax and NI in one large payment, you pay it over the course of the year, every time you are paid. Then, at the end of the year, you’ll receive a P60, which is a receipt that specifies the total sums paid to you and taken from you.
You will be requested to participate in self-assessment and pay the amounts you owe directly if you are self-employed.
Visit www.hmrc.gov.uk for further information.
Most of us (come on, admit it) will spend our lives not knowing where all of our hard-earned money goes.
To give you a quick rundown, the money we pay in income tax and national insurance contributions both go straight to the government. It is a frequent misperception that National Insurance funds our pensions and health care, when in fact, it all goes into the same pot for government spending.
Our taxes are essentially repaid in the form of government spending. This includes the environment, our streets, order and safety, running government, defense, health, assisting others, culture, education, administering the country, and social systems, among other things.
However, the following three areas dominate public spending: social security, health, and education. This might range from pensions and Winter Fuel Allowance to housing benefits, garbage disposal, park maintenance, immigration and border control, police and fire departments, and schools.
Check out this page if you want to learn more about where your tax money goes each day.
How do I change my NI category?
Complete the instructions below to fix the problem.
- Click the NI Category arrow under Current Tax Details, then the appropriate category.
Will I get a full State Pension if I opted out of SERPS?
If you were ever contracted out of SERPS or S2P, whether or not you’ve reached state pension age, the amount of state pension income you receive could be altered.
The new state pension went into effect on April 6, 2016. If you were eligible for a state pension before this date, you would have received the old ‘basic state pension.’ You may also be eligible for a ‘extra state pension,’ which will be lowered if you are ever contracted out of it.
If you attained (or will reach) state pension age after April 6, 2016, you will instead be eligible for the ‘new state pension.’ If you are ever hired out, the amount you receive may be reduced. (With the exception of some final wage schemes, contracting out was no longer available from April 6, 2012.)
If you want to boost your state pension because you don’t qualify for the full amount, you can do so by:
What does NI category M mean?
Employers will pay lower employer Class 1 secondary NI contributions for employees who fall under category M, which was introduced in the 2015-16 tax year.
To ensure that the category is applied appropriately, HMRC began sending Generic Notification Service (GNS) messages to businesses in April 2021, informing them that data indicated that they may have applied category M incorrectly to one or more of their payroll records. The GNS warnings are intended to encourage employers to do extra checks and make improvements as needed.
When an employee reaches the age of 21, NI category M can no longer be assigned to their record. It will be necessary to create a new NI contribution category, which will be determined by the employee’s status.
What NI category should I use for under 21?
Employees under the age of 21 who defer national insurance because they are already contributing in another employment fall into Category Z. (under 21 and have more than one job).
Employers will remove 0% from employees’ wages between £503 and £702 per month if they fall into category ‘Z.’ If you make more than £702.01 each month, a 2% deduction will be made.
The remaining profits over £162.01 are then deducted at a rate of 2%. £14.60 NI contribution
If you fall into category ‘Z,’ your company is required to pay 0% on earnings between £503 and £3863 per month and 13.8 percent on earnings over £3863 per month.
What is a Class 2 NIC?
Self-employed taxpayers pay Class 2 National Insurance Contributions (NICs). As part of the Self Assessment tax return procedure, they are calculated at a flat rate of 2.8 percent per week.
What is the difference between NI and PAYE?
PAYE is the amount deducted from your paycheck for tax purposes. You pay your income tax and national insurance using the Pay As You Earn (PAYE) system (NI). Your boss deducts tax and NI from your pay and submits it to HMRC every time you get paid. Other charges, such as student loan repayments or pension contributions, may be deducted from your pay. Every month, you may see all of this on your payslip.
Should I be paying PAYE and NI?
If you’re self-employed or have a part-time employment in addition to your full-time job, you’ll need to pay Income Tax and National Insurance in a different way than PAYE.
You must disclose and pay tax on your earnings if you are completely self-employed. A Self Assessment tax return is used to accomplish this.
Even if you supplement your income with a side job, you must still pay PAYE on any earnings from your full-time work. You will, however, have to file a Self Assessment tax return on the money you earn from your side hustle. But don’t worry if your self-employment income is less than £1,000. You don’t have to report it because it’s tax-free.
Is NI included in PAYE?
Employers must withhold tax and National Insurance from most payments provided to employees under the PAYE system.
To be able to use PAYE correctly, you must first grasp what counts as ‘pay’ for tax and National Insurance contributions (NIC) purposes (pay for the purpose of NIC is broadly the same as pay for tax although there are some differences). For additional details, see our salary and deductions guide.
Tax under the PAYE system
Under the PAYE system, an employer deducts income tax from an employee’s salary and pays it to HMRC. An employer uses a tax code to figure out how much tax to deduct from an employee’s compensation. A tax code is typically made up of a combination of numbers and letters, such as 1257L or K396.
Employees’ personal allowance (the amount they are allowed to earn before paying tax £12,570 in 2021/22) is distributed evenly throughout the year under the PAYE system. HMRC utilizes a tax code to tell an employer how much tax-free pay an employee is entitled to in a given pay period, so that the balance can be taxed at the proper rates. Depending on their specific circumstances, this might be the personal allowance amount of £12,570, or it could be greater or lower.
The higher a person’s income, the more income tax they must pay. On GOV.UK, you can examine the main income tax rates and personal allowances.
Rather than paying tax in one single sum, PAYE spreads an employee’s income tax liability across the tax year (which begins on April 6 and ends on April 5 the following year). It’s crucial to remember that PAYE isn’t a precise calculation of an employee’s tax burden; rather, it’s an estimate of the tax that the person should pay based on HMRC’s assessment of their expected earnings.
National Insurance under the PAYE system
You must collect and send NIC to HMRC if you employ someone, in addition to collecting and sending the correct amount of tax to HMRC.
NICs are paid to increase one’s eligibility for certain state benefits, such as the State Pension.
A proportion of earnings is used to calculate contributions. Payments are frequently made by both employees and employers. Employee contributions are referred to as primary Class 1 contributions, while employer contributions are referred to as secondary Class 1 contributions.
Employees do not have to pay NIC on pay up to £184 per week (£797 per month) in 2021/22. Employees will be treated as though they had paid NIC between the Lower Earnings Limit (LEL) of £120 per week (£520 per month) and this threshold, which can assist protect right to the State Pension and other benefits.
This is one of the reasons why, even if no money needs to be sent to HMRC, companies must always record and submit information on employees who earn at least the LEL through the PAYE system, so that HMRC may see that NIC must be shown as paid on the employee’s record.
Employers must pay NIC on any employee’s wage exceeding £170 per week (£737 per month) in 2021/22. On GOV.UK, you can see the key NIC rates. However, because most small businesses can save up to £4,000 on their National Insurance cost each year, there may not be any employer’s NIC to pay. More information is available in our Employment Allowance guidance.
It’s worth noting that, unlike tax, which is computed cumulatively (that is, by looking at everything that has happened thus far in the tax year), National Insurance is calculated on each payday by looking at the employee’s earnings, whether paid weekly or monthly.
Can you claim back National Insurance?
If you are employed or self-employed and are 16 or older but not yet eligible for the state pension, you must pay NIC. The amount of NIC you pay is determined by your income.
The sort of NIC you pay is determined by how you work. Employees and other workers (such as those engaged by agencies) pay different sorts of NIC to self-employed people (that is, those who work for themselves).
Even if you continue to work, you stop paying NIC when you reach state pension age. The self-employed must pay Class 4 NIC until the start of the tax year following the year in which they attain state pension age.
You pay National Insurance on earnings, such as wages and profits from self-employment, but not on pension income.
You may use the GOV.UK calculator to figure out when you’ll be eligible for a state pension.
I am a student. Do I have to pay National Insurance contributions?
Students, especially overseas students, are not subject to any particular rules. You will be required to pay National Insurance contributions in the same way as other UK workers. If you need a National Insurance number or have lost yours, see our page How do I get a National Insurance number? for help. A National Insurance number may be included on the reverse of a biometric residency permit for migrants or international students.
What are National Insurance credits?
Even if you are not working, you may be eligible for National Insurance credits in certain circumstances. Some, but not all, entitlements are affected by these. The state pension is the primary benefit they are eligible for.
For the year in which you may be credited, you must be 16 or older and under the age of state pension.
You may be eligible for National Insurance credits in a variety of situations, including being unable to work due to illness or caring for someone else.
National Insurance credits are divided into two categories: Class 1 credits and Class 3 credits. The type of credit you may be eligible for is determined by your specific circumstances. To get National Insurance credits, you must meet specific requirements.
National Insurance credits should be given automatically in some cases, such as if you receive employment and support allowance or carer’s allowance. In other cases, you’ll have to file a claim.
GOV.UK has more information on the many situations in which you can be eligible for National Insurance credits, as well as how to apply for National Insurance credits.
Adult Specified Credits (also known as babysitting or grandparent’s credits) are discussed on a separate page.
What benefits do my contributions pay for?
To be eligible for various UK government benefits, you must have paid a particular amount of National Insurance Contributions (NIC). Contributory benefits are a type of governmental benefit. National Insurance credits will apply toward these contributory benefits in some situations, but not in others. On GOV.UK, you should carefully review the eligibility requirements. Many benefits rely on the payment (or credit) of enough NIC to generate a qualifying year.
Other benefits are available regardless of whether or not you have paid any or enough NIC, as long as the requirements for claiming apply to you.
To figure out which type of donation goes toward which benefit, look at the table below:
There are several exceptions to the aforementioned, such as share fishermen and volunteer development workers who work in other countries.
Contributions to Class 4 National Insurance do not count toward any state benefits.
What are Class 1 National Insurance contributions?
If you work for an employer, or if you are an employee, you must pay Class 1 NIC. Before paying you, your company deducts the NIC from your wages. Your company is also required to pay NIC on your earnings, but you do not have to be concerned about this.
In the employment section, there is full information about Class 1 NIC, including instances.
What are Class 2 National Insurance contributions?
If you are self-employed, you must pay Class 2 NIC. Our self-employment section has more information.
The Self Assessment system is how HMRC collects Class 2 NIC. This means you are exempt from paying contributions during the tax year. Your liability will become due at the end of the tax year, and you will be able to pay it with your Self Assessment tax bill.
If you are self-employed and subject to Class 2 NIC, you must ensure that you are both registered for Self Assessment and registered for Class 2 NIC on HMRC’s systems. If you fill out form CWF1 when you start your own business, this should happen immediately.
HMRC may automatically reject your Class 2 NIC if you submit self-employed profits on a Self Assessment tax return without completing a form CWF1 since they have no record of your liability. In this situation, you should call HMRC at 0300 200 3500 to request a correction.
In some conditions, persons who are working (or self-employed) overseas can additionally pay Class 2 NIC. Please read our migration section for further details.
What is the Small Profits Threshold?
If you’re self-employed and your profits fall below a certain threshold (the Small Profits Threshold), you won’t have to pay Class 2 NIC. The limit for 2021/22 is £6,515.
What are Class 3 National Insurance contributions?
You can pay Class 3 NIC if you do not pay either Class 1 or Class 2 NIC and do not obtain National Insurance credits, but you want to maintain your rights to particular state benefits. Donations that are made voluntarily are also known as voluntary contributions.
Class 3 NIC can be paid by monthly Direct Debit or quarterly payment request for the current year. You can make a one-time payment for previous years’ contributions.
What are Class 4 National Insurance contributions?
If you are self-employed, you must pay Class 4 NIC. Class 4 NICs are paid in addition to Class 2 NICs, but they do not count toward any state benefits.
Only if your profits exceed a particular threshold, known as the Lower Profits Limit, are you required to pay Class 4 NIC. For 2021/22, this is £9,568.
You must pay Class 4 NIC in addition to any self-assessment income tax.
How do I pay National Insurance contributions?
Under the PAYE system, you pay Class 1 NIC on your wages. Your employer deducts Class 1 NIC and any income tax owed from your gross wages before deductions, and gives you the net amount after deductions.
Self Assessment allows you to pay Class 2 NIC along with the income tax payable on your self-employment profits. Alternatively, you can use a Budget Payment Plan to make payments on a regular basis during the tax year.
HMRC is known to refuse Class 2 NIC payments if they are not correctly registered as being payable (see above).
You can pay Class 3 NIC by quarterly bill or monthly Direct Debit for the current year.
Self Assessment is how you pay Class 4 NIC and the income tax payable on your self-employment profits. See How do I pay tax on self-employed income? for additional information.
How do I claim a refund of overpaid or incorrectly paid National Insurance contributions?
The total amount of NIC you must pay in a tax year is limited (across different classes of contribution). If you’ve only had one job, you shouldn’t have overpaid NIC. However, if your total earned income exceeds the weekly upper earnings limit multiplied by 53 (£967 x 53 = £51,251 in 2021/22), you may have overpaid National Insurance Contributions.
The NIC of each individual is not reconciled by HMRC. This is due to the fact that paying the incorrect amount of NIC is relatively unusual.
- You continued to work after reaching state pension age, and your employer continued to deduct Class 1 National Insurance Contributions;
- You paid Class 4 NIC on self-employment profits in a tax year after the one in which you achieved state pension age;
- When your earnings were below the Small Profits Threshold limit, you paid Class 2 NIC as a self-employed individual;
- You were both employed and self-employed at the same time, and you paid Class 1, Class 2, and Class 4 National Insurance contributions.
You cannot get a NIC refund if you stop working or do not work for the entire tax year.
Simply because you are leaving the UK to reside in another country does not entitle you to a NIC refund. Visit the migration area for further details.
How do I check my National Insurance contributions record?
HM Revenue & Customs (HMRC) keeps track of how much NIC people pay. You can look up your NIC record by going to:
- contacting HMRC’s National Insurance Enquiries Helpline (information available on GOV.UK);