National Insurance easily explained means cutting through the jargon around NI, earnings, profits, payroll and contributions. Whether you are employed, self-employed or running payroll as an employer, NI affects how much money is paid, what gets deducted and how your contribution record builds over time. Once we separate the different classes and roles, the whole subject becomes much easier to understand.

About this episode

National Insurance easily explained is for employees, employers and self-employed people who want a plain-English guide to NI.

We look at what National Insurance is, why it exists, who pays it, how the main classes work, and why your contribution record matters for State Pension and some benefit entitlements.

The original episode also discussed the planned April 2022 National Insurance increase for health and social care. That part now belongs in the historic category because the planned separate Health and Social Care Levy was cancelled and the temporary increase was reversed. Therefore, these notes focus on the evergreen structure while flagging that current rates and thresholds must always be checked.

Why National Insurance matters

NI matters because it affects workers, business owners and employers in different ways.

If you are employed, your employer normally deducts NI from your pay through PAYE. If you are self-employed, you usually deal with NI through Self Assessment. However, if you employ people, NI also becomes part of your payroll cost.

It also helps build your contribution record for certain benefits and State Pension entitlement. Therefore, understanding NI is not only about today’s tax bill. It can also affect your future position.

Key points from this episode

What is National Insurance?

National Insurance is a UK tax-style contribution connected to work, earnings and profits.

The word “insurance” can be misleading. NI is not like private insurance where you choose a policy. Instead, it forms part of the UK tax system and helps fund areas such as the NHS, State Pension and certain welfare benefits.

For business owners, the practical point is simple. NI forms part of the cost of earning money, paying yourself and employing people.

Who pays NI?

NI can affect three main groups:

• employees;
• self-employed people, including sole traders and partners;
• employers who pay wages, salaries and certain benefits.

The amount depends on your role, earnings, profits, age, thresholds and the relevant NI class.

If you are self-employed, our episode on Tax basics for self employed: What You Need to Know is a useful wider guide.

NI classes explained

The NI system uses different classes to show who pays, how they pay and what the payment relates to.

• Class 1 applies to employees and usually comes through payroll.
• Employer Class 1 applies to employers on employee earnings above the relevant threshold.
• Class 1A and Class 1B relate to certain employee benefits and expenses.
• Class 2 relates to self-employed people and can help protect NI records.
• Class 3 is voluntary and can help fill gaps in your NI record.
• Class 4 applies to self-employed profits above the relevant threshold.

Once we separate the classes, the system becomes easier to follow. For example, employees, employers and self-employed people do not all pay NI in the same way.

Employees and Class 1 NI

If you are employed, your employer normally deducts Class 1 NI before you receive your wages or salary.

Your payslip should show the amount deducted. The exact amount depends on your earnings and the current thresholds and rates.

The original episode used 2021/22 figures. However, those figures should not be reused as current advice because rates and thresholds have changed since then.

Employers and payroll costs

If you employ people, NI becomes part of the cost of taking on staff.

Employers may pay employer contributions on employee earnings. They may also pay Class 1A or Class 1B on certain benefits and expenses.

This matters for budgeting, pricing and payroll planning. The cost of employing someone is not only the salary shown in the employment contract.

Our episode on Saving Tax with Company Benefits: Pay Yourself and Your Team Tax-Efficiently connects with this because benefits can create employer NI obligations.

Self-employed NI

If you are self-employed, NI usually follows your taxable profits rather than your sales.

That distinction matters. You do not pay self-employed NI on the amount you invoice customers. Instead, you look at taxable profit after allowable business expenses and tax adjustments.

Class 2 and Class 4 can both affect self-employed people. Because the treatment changes over time, check current GOV.UK guidance before calculating a tax bill.

For the sole trader angle, our episode on Tax Treatment for Sole Traders Explained is a strong supporting step.

NI and benefit entitlement

NI affects more than the amount you pay now.

Your contribution record can affect entitlement to certain state benefits and State Pension. As a result, gaps in your NI record can matter later.

The original episode mentions Jobseeker’s Allowance, Employment and Support Allowance, and State Pension. However, the current rules can be specific, so check your own record instead of relying on guesswork.

Voluntary NI contributions

Class 3 voluntary contributions can help fill gaps in your NI record in some circumstances.

Self-employed people may also be able to make voluntary Class 2 contributions, depending on their profit level and record position.

However, do not pay voluntary contributions blindly. First, check your State Pension forecast and NI record. Then, take advice where needed.

NI and State Pension records

Your NI record affects your State Pension position.

For many people under the new State Pension system, qualifying years are important. Some people need at least 10 qualifying years to get any new State Pension, and the amount depends on the record built up.

The original episode mentions 35 qualifying years for a full State Pension. That may still be relevant for some people, but the exact answer depends on your personal history, especially where your record started before April 2016 or where you were contracted out.

The old Health and Social Care Levy section

The original 2021 episode discussed the planned April 2022 NI increase for health and social care.

That section now belongs in the historic category. The planned separate Health and Social Care Levy was cancelled, and the temporary increase was reversed.

However, the useful lesson remains. NI rules can change, so we should understand the structure and then check current rates before acting.

National Insurance checklist

• Are you employed, self-employed, an employer, or more than one of these?
• Do you know which NI class applies to you?
• Are your payslip deductions being checked?
• Are self-employed profits being calculated correctly?
• Have you allowed for employer contributions in payroll costs?
• Do employee benefits create Class 1A or Class 1B charges?
• Have you checked your NI record?
• Are there gaps that could affect your State Pension?
• Would voluntary contributions help or not?
• Have you checked current GOV.UK rates before relying on old figures?

FAQs about National Insurance

What is National Insurance?

National Insurance is a UK contribution linked to work, earnings and profits. It helps fund public services and builds entitlement towards certain benefits and State Pension.

Who pays NI?

Employees, self-employed people and employers can all pay NI. The class and amount depend on employment status, earnings, profits and current thresholds.

What are NI classes?

NI classes are categories used to work out who pays and why. Employees usually pay Class 1, employers may pay employer Class 1 and Class 1A or 1B, self-employed people may be affected by Class 2 and Class 4, and Class 3 is voluntary.

Can I pay NI voluntarily?

Yes, voluntary contributions may be possible where there are gaps in your record. Check your NI record and State Pension forecast before deciding.

Episode Timecodes

• 00:00 – National Insurance for self-employed people, employees and employers
• 00:50 – Why understanding NI helps your numbers
• 01:10 – What National Insurance is
• 01:34 – Who pays National Insurance
• 01:56 – Headline rates and self-employed NI in the original episode
• 02:19 – Employee and employer NI
• 02:39 – Earnings, profits and thresholds
• 03:44 – Low earnings and NI credits
• 04:43 – NI classes explained
• 05:03 – Class 2, Class 3 and voluntary contributions
• 05:31 – Gaps in your NI record
• 05:56 – State Pension and benefit entitlement
• 06:37 – Historic planned April 2022 NI increase
• 07:21 – What the old increase meant in money terms
• 08:13 – Final summary and no nightmares

Related episodes

• Tax basics for self employed: What You Need to Know
• Tax Treatment for Sole Traders Explained
• Saving Tax with Company Benefits: Pay Yourself and Your Team Tax-Efficiently

Key takeaway

NI becomes clearer once we know your role in the system. Employees usually deal with it through payroll. Self-employed people deal with it through profits and Self Assessment. Employers need to budget for payroll and benefit-related costs.

The key is to check current rates, understand which class applies, and review your contribution record before making decisions about voluntary payments or future pension entitlement.

Plan it, Do it, Profit.

“NI may look like a maze, but once we separate employees, employers, self-employed people and voluntary contributions, the picture becomes much clearer.”

Further Support

The I Hate Numbers podcast helps business owners understand tax, National Insurance, payroll, Self Assessment, VAT, bookkeeping, accounting and business finance in a practical way. We simplify financial topics so you can make better decisions and feel more confident with your numbers.

If you want support with NI, payroll, Self Assessment, employer obligations or tax planning, you can contact us for an initial chat.

You can also watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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Are you self-employed, or an employee, or an employer who's confused about national insurance? This week I'm going to be talking about national insurance, NI for short, what it is, why you pay it, and how much you pay. Be aware, the government has announced a hike in NI to fund social care. Fear not. That's covered

later in this week's podcast.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. Welcome to another weekly episode of I Hate Numbers. The podcast is part of my mission to inform, inspire, and educate you to get closer to your numbers. Above all, you can make more profit, save tax, save time, improve your well-being, and financial understanding. How cool is that? Let's crack on with the podcast.

What is national insurance? Now, don't be misled by the word insurance. NI is a tax. It's a tax that was introduced back in 1911 to provide a fund for those out of work and seeking medical benefits. It has now grown to provide, in principle, funding for the NHS, state pensions, and other welfare benefits such as job seekers' allowance. Who pays national insurance?

The payers of national insurance are self-employed, and employees who are over 16, and below state retirement age, and employers. Self-employed includes sole traders, and partnerships, and employees and employers are within the PAYE system. How much you pay depends on your level of earnings and your employment status.

Let me run through some headline numbers with you. Please check out the show notes for some more detail. Let's deal with the self-employed. There are two rates called a main rate, followed by a rate, which applies once you go over what's called an earnings threshold. So, for the year 21/22, the percentage rates are 9% as the main rate, and then a 2% is levied

once you exceed the threshold level. For employees, it's a similar principle. There's a 12% headline, main rate, and then a 2% supplement that applies once you as an employee exceed the threshold level of earnings. For employers, there is no upper limit and there is only one rate, and that rate is currently

13.8% over an earnings threshold. Now, what do we mean by earnings? Now, earnings for the self-employed, effectively, tax-adjusted profits, so not what you invoice your clients, but the profits you declare for tax purposes for the year 21/22. The thresholds are 9568, going up to what's called a high limit of 50,270.

Again, if you haven't committed those numbers to memory, fear not. Check out the show notes for a table that shows you what these figures are. If you're an employee, then your earnings threshold is fundamentally your salary and wages, bonuses, and tips, and your earnings threshold is the same level as it is for the self-employed. For employers,

unfortunately, the earnings threshold is lower. Once your employees have earnings over 8840, then you pay employer's National Insurance at 13.8%. Earnings for an employer, by the way, is not only wages and salaries that are paid up, but it will also include the value of any benefits in kind provided to your employees.

So if you provide company cars, medical insurance, private mileage, those will be taken as employee benefits, and they'll be included when you work out the national insurance charges. Now, before we proceed on with this, it's worth noting that if you are an employee, then if you earn below 120 pounds per week, there is no national insurance that is payable. If your earnings are

between 120 and 184 pounds per week, you don't actually pay any national insurance. No money leaves your wage packet. No money leaves your accounts, but you instead, you are credited with some national insurance. Now, that's good news because national insurance, as we said at the beginning, contributes towards state pension

and other welfare benefits. So, even though no physical payment is made, you'll still be credited with some national insurance. Just to add to this, we've talked about the rates, we've talked about the thresholds. For national insurance purposes, we also have another piece of vocabulary, which I'm going to introduce to you.

I've got my jargon buster by my side, and that's what we have by calling national insurance. We divide it up into classes, so for employees, employees pay Class One National Insurance, as do employers, self-employed pay Class Two and Class Four. The Class Four refers to the table of numbers that I've read out to you.

Class Two is a smaller flat rate contribution that's currently levied at just a shade over three pounds per week when your profits exceed approximately six and a half thousand pounds. Now, if you've done your number calculation correctly, that's Class One, Class Two, and Class Four. The missing number, it hasn't been omitted, is Class Three called a Voluntary Contribution, and there are instances where you can volunteer to pay national insurance.

It sounds crazy, but it's true. Now, you may have gaps in your national insurance record, and you may not get any national insurance credits, and this could be for a number of reasons. You could be in employment, but your earnings were very modest, very low. You could be unemployed and not claiming benefits. You could be self-employed, but you haven't made any contributions, not even the flat rate class two national insurance because your profits are quite small.

You may be in a loss-making situation, or you could have been living or working outside of the United Kingdom. Now, gaps in your national insurance record means that you may not build up enough contributions to either get the full state pension. Currently, you need 35 qualifying years of national insurance contributions to qualify for a full state pension.

It may also mean that there are other benefits such as job seekers allowance that you may not be entitled to because you haven't made enough national insurance contributions. You can elect to pay voluntarily to plug those gaps. Check out the show notes after the broadcast to check for a link so you can check out your own NI records.

So I've talked about what national insurance is, why you pay it, the amounts that you pay. What I want to conclude now on this week's episode is to talk about the proposed increase in NI plan for April 2022. The plan increase is to help fund social care by increasing national insurance for those who are self-employed, employees, and employers.

The irony is that those who are at state retirement age, for example, will not pay national insurance, and they don't pay the increase. There's a planned increase of two and a half percent, which will be split between employee and employer. So, the main rate of 12 percent moves up to 13 and a quarter. The 2% supplement increases to three and a quarter percent.

If you're self-employed, then your main rate goes from nine to ten and a quarter, and your supplement increases likewise from two to three and a quarter. As an employer, your 13.8% rate shifts upwards to a shade over 15%. What does that mean in pound notes terms? If your earnings are 20,000, whether that's profits, or wages and salaries, that means you pay an extra 130 pounds a year from April, 2022.

If your earnings are in the region of 50,000 pounds a year, that equates to an extra 505 pounds per year. The proposed increase is meant to be temporary. I'll say meant to be temporary. So, from 23/24 onwards, that increase will be replaced by a social fund levy. That social fund levy will be payable by all, even those who are at retirement age.

Okay, folks, I hope you found this podcast useful. If you found it useful, obviously I'd love it if you could share it with those who will get some benefit from that. Subscribe to the channel, and as a hat trick, I'd love it if you could leave some comments on the podcast accordingly. Until next week, folks, have a great week, and don't have nightmares.

We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.