National Insurance: What You’re Actually Paying For
It’s not insurance and it’s not a pension fund — but it affects both
What Does NI Fund?
National Insurance was originally designed to fund the State Pension, NHS, and unemployment benefits. In practice, it’s basically a second income tax with a confusing name. Your NI record determines your State Pension entitlement.
Employee NI Rates (Class 1)
| Earnings | Rate |
|---|---|
| Below £12,570/year | 0% (but you get credits from £6,396) |
| £12,570 – £50,270 | 8% |
| Over £50,270 | 2% |
Employer NI
Your employer also pays NI on your behalf — 13.8% on earnings above £9,100. This is invisible to you but it’s a real cost of employing you. It’s why employers love salary sacrifice: it reduces NI for both parties.
Key Concept
Your “true” tax rate on employment income between £12,570 and £50,270 is actually 28% (20% income tax + 8% NI). On £50,271–£125,140, it’s 42% (40% tax + 2% NI). Add employer NI and the total cost of paying you is even higher.
NI Classes Explained
| Class | Who Pays | Purpose |
|---|---|---|
| Class 1 | Employees (via PAYE) | State Pension, benefits |
| Class 2 | Self-employed (flat rate) | State Pension qualification |
| Class 3 | Voluntary contributions | Fill gaps in NI record |
| Class 4 | Self-employed (on profits) | Percentage of profits |
NI Credits
You can get NI credits (counted as if you paid contributions) if you’re:
- Claiming Child Benefit for a child under 12
- Claiming Jobseeker’s Allowance or Universal Credit
- Caring for someone for 20+ hours per week
- On statutory sick, maternity, or paternity pay
State Pension: 35 Years
You need 35 qualifying years of NI to get the full State Pension (£221.20/week in 2024/25). You need at least 10 years to get anything at all. Check your record at gov.uk/check-national-insurance-record.
Real-World Example
If you have gaps in your NI record, you can buy voluntary Class 3 contributions at £17.45/week. Each year you buy adds roughly £329 per year to your State Pension for life. That’s a £907 investment that pays back every single year — one of the best “investments” available.
Self-Employed NI
If you’re self-employed, you pay:
- Class 2: £3.45/week (flat rate) if profits are over £12,570
- Class 4: 6% on profits between £12,570 and £50,270, then 2% above that
Warning
NI rates change frequently. The rates here are based on 2024/25. Always check the latest figures at gov.uk/national-insurance-rates-letters.