What is it:
- It is a mandatory contribution made to the social security pot. It was first introduced in 1911 to help people who had lost their jobs or required medical care. National Insurance contribution entitles you to the basic state pension when you reach the pension age.
Who pays NIC:
- Employees and self-employed people aged over 16 and earning or making a profit (in the case of the self- employed) over the stipulated threshold, and employers.
Types/Classes of NICs
- Class 1 – paid by employees over 16 years earning more than £184 (2021/22 threshold) a week. It is deductible from an employee’s gross salary
- Class 1A – paid by the employer for each employee (additional cost to the employer, on top of salary)
- Class 2 – paid by self-employed people with profits over £6515 (2021/22 threshold) per year. Payable on profit between £6515 and £9568. If profits earned are below £6515, self-employed can opt to make voluntary contributions to fill the gaps of their contributions in the year
- Class 4: paid by self – employed people with profits over £9,569 per year. This is payable on profit above £9,569
- Class 3: voluntary contributions paid to fill gaps in the contributions made in any given year
Rates payable are shown on the gov.uk website.
Why make contributions:
- It is mandatory and automatically deducted at source (if employed)
- The contribution made will determine the amount of state pension receivable when you attain pensionable age (hence some people might opt to make voluntary contributions to ensure they have enough qualifying years of contribution to be entitled to the full state pension.)
To obtain full state pension, you must possess 35 qualifying years of contributions.
Qualifying years:
- A year of your work life is deemed to be a full qualifying year if you have paid/been credited with NICs which is 52 times the weekly lower earning limits for that year.
Use of NICs
Contributions made are used by the government to provide in addition to state pension, for other benefits like maternity allowance, contribution based job-seekers’ allowance, contribution based employment and support allowance, bereavement allowance.
It is worth being financially savvy and checking your record. You can check here, but will require a Government Gateway user ID and password to check. If you don’t already have one, you can create one when using the link.
Take the time to check how many full qualifying years or not, you have which would aid your decision to either make voluntary contributions to fill the gap or not. This all fits into planning your future finances. Whether you choose to fill the gaps or not, at least it would be an informed decision and you’ll be prepared for the consequences of the decision made.
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📝 Originally shared under my first blog, bitalks; part of the journey that shaped Life’s Riches.