How is National Insurance calculated in the UK?

How is national insurance tax calculated

National Insurance contributions also popularly known as NIC is calculated on the basis of your employment status and your earnings. There is a vast difference in the way National Insurance contributions for employed and the self employed is calculated.

Regardless whether you are employed or self employed, paying National Insurance (NI) is mandatory. Only in certain cases, you are exempted from paying National Insurance (NI).

We'll discuss how National Insurance (NI) is calculated in detail below. First, let's begin with National Insurance contributions for the Self Employed.

How is National Insurance (NI) calculated for the Self Employed?

There are 2 types of National Insurance contributions applicable to the Self Employed, Class 2 and Class 4. Which class is applicable to you, will depend on your profits. If your profit after deducting allowable expenses is less than £6,025 then, you are exempted from paying Class 2 contributions, which means, you can choose not to pay National Insurance at all. However, voluntary National Insurance contribution is always possible.

If your annual profits are between £6,025 and £8,164 then, you are required to pay Class 2 contributions at the rate of £2.85 per week for the tax year 2017-18. However, if your income is above £8,164 then, you are required to pay Class 2 and Class 4 contributions. For the tax year 2017-18, Class 4 contributions are calculated at the rate of 9% + £2.85 per week if your profits are between £8,164 and £45,00, and if your profits after deducting expenses are above £45,000 then, Class 4 contributions are calculated at the rate of 2% of your profits + £2.85 per week.

National Insurance Rates for the Self Employed

Profit after allowable expenses:

If your earnings are less than £6,025 then, 0%

Between £6,025 to £8164, NI rate is £2.85 per week

Between £8,164 - £45,000, NI rate is 9% + 2.85 per week

More than 45,000, NI rate is 2% + £2.85 per week

National Insurance Calculation Example for the Self Employed:

Profits (after deducting allowable expenses)

Less than £6,025 = 0% National Insurance Contributions OR Voluntary contribution at the rate of £2.85 per week

£6,025 - £8,164 = £2.85 per week, i.e. £2.85 x 52 weeks per year = £148.20

£8,164 - £45,000 = 9% + £2.85 per week. For example, if your income is £44,000, calculation would be: £44,000 - £8,164 (2nd slab upper limit) = £35,836 x 9% rate = £3,225 + £148.20 (£2.85 per weeks x 52 weeks per year) = £3,373.20 will be your National Insurance Contribution

£45,000 and above = 2% + £2.85 per week. For example, if your income is £46,000 then, calculation would be: £46,000 - £45,000 (2nd slab upper limit) = £1,000 x 2% (3rd slab NI rate) = £20. Now, £45,000 (2nd slab upper limit) - £8,164 (2nd slab lower limit) = £36,836 x 9% rate (2nd slab rate) = £3,315. Now, add both £20 + £3,315 = £3,335.24 + £148.20 = £3,483 will be your NI contribution if your profits after allowable expenses is £46,000 for 2017-18 tax year.

How is National Insurance (NI) calculated for the Employed?

If you are a full-time employee or if you have an employer then, Class 1 National Insurance contributions will be applicable to you. Your employer will deduct Class 1 National Insurance (NI) from your salary, overtime, sick pay, commission or bonus, maternity/paternity and adoption pay. Because, it is their responsibility to pay your National Insurance (NI). It is calculated on your gross earning, before deducting tax and/or pension.

For employed people, National Insurance (NI) threshold is £8,164 for the tax year 2017-18. This means, if your income is £8,164 or below during the 2017-18 tax year then, you are exempted from (you do not have to pay) paying National Insurance. But, if your income is between £8,164 and £45,000, you are required to pay 12% of your earnings as National Insurance Contributions (NIC). Anything above £45,000 is 2% of your earnings towards National Insurance.

National Insurance Rates for the Employed

If your income is less than £8,164, you are exempted from National Insurance contributions

Between £8,164 - £45,000, NI rate is 12% of your income

More than 45,000, NI rate is 2% of your income

National Insurance Calculation Example for the Employed:

Annual Income:

£8,164 or below - NI Exempt / £0.00

£8,164 - £45,000 - Let's assume your income is £41,000, you'll be required to pay £3940.32 towards National Insurance.

Calculation: £41000 - £8164 (Exempt limit) = £32,836 x 12% = £3940.32 NI @ 12% of your gross earnings

£45,000 and above (2% NI) - Let's assume your income is £49,000, you'll be required to pay £4500.32 towards National Insurance.

Calculation:

This one will be slightly tricky, we have tried to keep it simple:

1. £45,000 (2nd slab) - £8164 (exempt limit) = £36,836 x 12% (2nd slab NI rate) = £4,420.32

2. £49,000 (income) - £44,999 (2nd slab upper limit) = £4,001 x 2% (3rd slab NI rate) = £80.02

3. 2nd slab result + 3rd slab result = £4,420 + £80 = £4500 will be your NI contribution

For people missing National Insurance contributions due to unemployment, exemption or for any other reason, Class 3 voluntary contributions can be made at the maximum possible rate of £14.25 per week for the tax year 2017-18.

If you need any more information or if you have any queries regarding National Insurance contributions, please get in touch with us. Simply fill in the Request a Call Back form on this page or write to us at [email protected] and we will be more than happy to help.

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