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.

Also read: How will the April 2022 National Insurance rise affect the UK workforce?

Before heading to the calculations, please first look at the effect of the Spring statement on the National Insurance contributions.

Joanne Harris, Head of Technical, Compliance and Payroll at Parasol Group said:

Following today’s Spring Statement, National Insurance contributions remain set to increase from April 2022 in line with new government legislation.

Umbrella employees could be impacted by a double whammy of NI rises, as both employer and employee National Insurance contributions are increasing, meaning that if the assignment rate agreed with the agency or end hirer is not increased to account for the rising employment costs umbrella employees will see an overall NI increase of 2.5%, resulting in a reduction in total take home pay.

For employees working through an umbrella, the employer National Insurance contribution is included with other employment costs in the agreed assignment rate. Employee contributions, along with income tax, are deducted via the Pay As You Earn (PAYE) scheme.

The Chancellor’s surprise announcement of an increase in the National Insurance threshold to £12,570 was welcome news and will help to offset the rise somewhat, although there was no increase in the thresholds for employer NI.

The increase in NI contributions has been announced by the government as a means to increase spending on health and social care. Umbrella employees should speak to their agency or end hirer to confirm the uplift in assignment rate from 6th April.

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 £6,515 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 £6,516 and £9,568 then, you are required to pay Class 2 contributions at the rate of £3.05 per week for the tax year 2021-22. However, if your income is above £9,569 then, you are required to pay Class 2 and Class 4 contributions. For the tax year 2021-22, Class 4 contributions are calculated at the rate of 9% + £3.05 per week if your profits are between £9,569 and £50,270, and if your profits after deducting expenses are above £50,270 then, Class 4 contributions are calculated at the rate of 2% of your profits + £3.05 per week.

National Insurance Rates for the Self Employed

Profit after allowable expenses:

If your earnings are up to £6,515 then, 0%

Between £6,516 to £9,568, NI rate is £3.05 per week

Between £9,569 - £50,270, NI rate is 9% + 3.05 per week

More than 50,270, NI rate is 2% + £3.05 per week

National Insurance Calculation Example for the Self Employed:

Profits (after deducting allowable expenses)

Less than £6,515 = 0% National Insurance Contributions OR Voluntary contribution at the rate of £3.05 per week

£6,515 - £9,568 = £3.05 per week, i.e. £3.05 x 52 weeks per year = £158.60

£6,515 - £50,270 = 9% + £3.05 per week. For example, if your income is £50,270, calculation would be: £50,270 - £9,569 (2nd slab upper limit) = £40,701 x 9% rate = £3,663.09 + £158.60 (£3.05 per week x 52 weeks per year) = £3,821.69 will be your National Insurance Contribution

£50,270 and above = 2% + £3.05 per week. For example, if your income is £51,000 then, calculation would be: £51,270 - £50,270 (2nd slab upper limit) = £1,000 x 2% (3rd slab NI rate) = £20. Now, £50,270 (2nd slab upper limit) - £9,569 (2nd slab lower limit) = £40,701 x 9% rate (2nd slab rate) = £3,315. Now, add both £20 + £3,315 = £3,335.24 + £148.20 = £3,663.09 will be your NI contribution if your profits after allowable expenses is £51,270 for 2021-22 tax year.

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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 £9,569 for the tax year 2021-22. This means, if your income is £9,568 or below during the 2021-22 tax year then, you are exempted from (you do not have to pay) paying National Insurance. But, if your income is between £9,569 and £50,270, you are required to pay 12% of your earnings as National Insurance Contributions (NIC). Anything above £50,270 is 2% of your earnings towards National Insurance.

National Insurance Rates for the Employed

If your income is less than £9,569, you are exempted from National Insurance contributions

Between £9,569 - £50,270, NI rate is 12% of your income

More than 50,270, NI rate is 2% of your income

National Insurance Calculation Example for the Employed:

Annual Income:

£9,568 or below - NI Exempt / £0.00

£9,568 - £50,270 - Let's assume your income is £50,270, you'll be required to pay £4884.24 towards National Insurance.

Calculation: £50270 - £9568 (Exempt limit) = £40,702 x 12% = £4884.24 NI @ 12% of your gross earnings

£50,270 and above (2% NI) - Let's assume your income is £51,000, 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. £50,270 (2nd slab) - £9568 (exempt limit) = £40,702 x 12% (2nd slab NI rate) = £4,884.24

2. £51,000 (income) - £50,269 (2nd slab upper limit) = £731 x 2% (3rd slab NI rate) = £14.62

3. 2nd slab result + 3rd slab result = £4,884 + £14.62 = £4898.62 would 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 £15.40 per week for the tax year 2021-22.

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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