What are national insurance contributions (NIC)?
National insurance helps to pay for some state benefits including retirement pensions. Your national insurance contributions (NIC) earn you the right to receive certain benefits.
Whether you are working for an employer or are self employed and working for yourself or for a partnership will affect the type of contribution you pay.
Employees pay Class 1 national insurance contributions of 12% on earnings above the lower limit of £155 per week primary threshold.
If your income falls below this, you will not need to pay any contributions.
Employers are also expected to pay Class 1 NICs (known as secondary contributions) at 13.8% on the earnings of each employee who earns more than the primary threshold. This contributes, among other things, towards the employee's entitlement to statutory payments.
If you are self employed, you pay two types of NICs.
A weekly flat rate (Class 2) is payable. The various options for paying Class 2 can be found on the HM Revenue and Customs website (link opens in a new window).
The second type of NICs (Class 4) are based on the level of your profits.
You can also pay voluntary NIC (Class 3).
If you are self employed and you think your profits will be less than a set limit - £5965 - you can elect not to pay any flat rate Class 2 contributions during the year and then the position can be reviewed once you know what your profits were for that tax year. This is called a Small Earnings Exception (SEE). You can download form CF10 (link opens in a new window) in order to claim the exception.
To see how the Small Earnings Exception works you can have a look at the example of Lars below:
Lars is a self-employed ice cream seller. Business has been poor for a couple of years and Lars thinks that his profits for 2015/2016 will be around £4,500. In December 2014, Lars applied for Small Earnings Exception to apply for 2015/16. The claim was accepted so he has not needed to pay any contributions during 2015/16.