The tax paid by a British employee for government funding is known as National Insurance Contributions(NIC). The contribution for national insurance calculation is dependent on your earnings in a particular period. It is deducted from the salary and bonuses you receive.
To assist sick and unemployed workers, the government started the system in 1911. In the 20th century, NIC reach out to Universal healthcare, unemployment benefits, and the public pension program.
Workers can contribute additional payments to NIC and build up an entitlement over time. This amount is paid back later as pension and other government benefits.
National Insurance Contribution applies to the earnings of employed individuals and the profit of self-employed individuals. NIC is different from income tax, as both the employee and employer need to pay it.
How to calculate an employee’s NIC?
All employees and self-employed individuals need to pay NIC if their income is above the primary threshold level. Otherwise, you don’t need to pay NIC. You need to pay your taxes and NIC till your retirement.
For full-time employees, class 1 National Insurance contributions are applicable. The employer will deduct NI from your salary, bonus, maternity pay, overtime, and sick pay. Consider your gross salary while calculating NIC.
- The primary threshold level for employed people in the tax year 2021-22 is £9,564.
- If your income is below this level, you are free from NIC. That means income between £120-£184 per week and £520-£797 per month pays nothing to NIC.
- If your income is between £184.01 to £967 per week and £797.01 to £4,189 per month, you pay 12% of your income as NIC. Except for Category B, it is 5.85%, and for J and Z, it is 2%.
- If you earn more than £967 weekly and £4,189 monthly, you need to pay an NI rate of 2%.
- Category letter C is free from NIC.
How to calculate the NI rate for self-employed individuals?
Self-employed individuals fall under two categories of NIC, Class 2 and Class 4.
- If your profit amount after deducting allowance is lower than £6,515, you don’t have to pay National Insurance.
- If your profit amount is somewhere between £6,515 and £9,568, you need to pay Class 2 National Insurance contributions @ £3.05 per week.
- If your profit amount is between £9,569 and £50,270, you need to pay NI @ 9% class 4 contribution + Class 2 contribution @ £3.05 per week.
- For income after deducting allowance, is above £50,270, you pay class 4 contribution @ 2% on your profit + class 2 contribution @ £3.05 per week.
For example, if your profit after deducting allowance is £60,000. Let us calculate your NIC.
- £60,000 – £50,270 ( 2nd slab upper limit) = £9730
£9730 × 2% ( 3rd slab NI rate) = £194.6.
- £50,270 – £ 9569 (2nd slab lower limit) = £40,701
£40,701 × 9% (2nd slab NI rate) = £3663.09
- Now, add both the contributions at two levels, £194.6 + £3663.09 = £4187.37 Class 4 contribution.
- £3.05 × 52 (1 year = 52 weeks, and Class 2 contribution is £3.05 per week) = £158.6
- So, your NIC for the tax year 2021-22 is £4187.37 + £158.6 = £4,345.97
How to calculate an employer’s NIC?
Employers need to pay a class 1A and 1B National Insurance for providing an employee with benefits-in-kind and lump-sum payments. The NI rate is 13.8% for the tax year 2021-22.
As an employer, calculate your NIC as per the following slab:
- You pay 0% NI rate for income between £120-£170 weekly and £520 to £737 monthly.
- Employers with a weekly income of £170.01 to £976 and a monthly income of £737.01 to £4,189 pay 13.8% NI, except category H, M, and Z.
- If you earn more than £967 a week and £4,189 a month, you pay NI @ 13.8%.
It is now mandatory for British employees to pay NIC from age 16 to their official retirement age.
The government subtract NI for employees from their gross income. Therefore, you need to calculate it beforehand. Employers deduct NI along with income tax. Self-employed individuals can pay NI through self-assessment tax returns. To calculate the NI rate, you can use an online calculator or do it manually.