National insurance contributions
NI contributions are a compulsory tax on earnings and profits above certain levels (set annually).
The legal position
NI contributions are payable under section 2 of the Social Security Act 1975, as amended by the Social Security Contributions and Benefits Act 1992.
Special features
Employed people pay class 1 NI contributions directly from their wages and so do not build up arrears. Class 2 contributions can be paid by self-employed earners on a voluntary basis. In addition, self-employed people may have to pay class 4 contributions, calculated as a percentage of their profits above a certain level (set annually). After the year end, HMRC sends out demands to self-employed people from whom it has not received the required class 2 contributions.
National insurance classes
The class you pay depends on your employment status and how much you earn.
National insurance class | Who pays |
|---|
Class 1 | Employees under state pension age earning more than £242 a week from one job – they are automatically deducted by your employer. |
Class 1A or 1B | Employers pay these directly on their employee’s expenses or benefits. |
Class 2 | Self-employed people earning profits of £12,570 or more a year. From the 2024/25 tax year, class 2 contributions are only paid on a voluntary basis. |
Class 3 | Voluntary contributions – you can pay them to fill or avoid gaps in your NI record. |
Class 4 | Self-employed people earning profits of £12,570 or more a year. |
If a self-employed person has also employed someone else, they may be liable for class 1 NI contributions for the employee, as well as class 2, and perhaps 4, contributions for themself.
Demands for payment should be distinguished from the notice sent to people whose contribution record is insufficient to entitle them to use it towards a retirement pension or bereavement benefits. In such cases, HMRC sends a notification giving the opportunity to make up the deficit for a particular year with voluntary (class 3) contributions. This is not a demand for payment.
It is vital that the client pays any ongoing contributions on time and makes arrangements to repay any arrears, otherwise HMRC can take control of essential goods without a court order and so close down a business. In addition, if contributions remain unpaid, the client’s eventual entitlement to contributory benefits, including retirement pension, will be affected.