National Insurance

National Insurance is a back door tax by the Treasury. The money collected from income earners is used to pay for most social security benefits.

There are four types of National Insurance (NI) contributions.

Who pays what ?

Class 1 Employers and employees (with earnings above the lower limit) pay this. The amount they pay is based on a segment of each persons earnings (the segment is that income above the lower earnings limit and up to the upper earnings limit).

Class 2 Contributions are paid by the self employed (but not those whose income is below a certain level.) This is a weekly flat rate and entitles the contributor most social security benefits but not unemployment, invalidity or widows pension.

Class 3 Contributions are voluntary. They are paid by those who do not earn enough to pay Class 1 or Class 2 contributions but would like to top up their benefit entitlement so that they can enhance the value of their state pension.

Class 4 Contributions are paid by the self-employed. They are paid as a fixed percentage on those profits which are chargeable to income tax and fall between the lower and upper earnings limits.

The self-employed receive no extra social security benefits for paying Class 4. It's worth noting however, the self-employed receive a modest amount of tax relief on Class 4 contributions.

See also...our tax tables

Last Updated: November 2007 © Moneyextra.com

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