National Insurance contributions

National Insurance is a state scheme which pays certain benefits, including:

• retirement pensions
• widow’s allowances and pensions
• jobseeker’s allowance
• incapacity benefit
• maternity allowance.

The scheme is run by HMRC and funded by employees who are currently in employment. Most people in employment (including partners in partnerships, and sole traders) who have earnings above a certain level must pay National Insurance contributions.

Types of National Insurance contributions

Both the employer and the employee pay National Insurance contributions.

Employees’ National Insurance contributions

The employer deducts National Insurance contributions from an employee’s weekly wage or monthly salary, and pays these to HMRC.

Income tax and National Insurance contributions are both taxes on income, but they have different historical origins and are calculated in different ways. Employees’ National Insurance is now very similar to income tax in many respects, and is really a form of income tax with another name.

Like income tax, employees’ NI contributions are deducted from gross pay. The amount of the contributions an employee pays is linked to their earnings, and can be worked out by looking at National Insurance tables supplied by HMRC. You might come across this in your workplace, if you are ever involved in payroll.

Employer’s National Insurance contributions

In addition to deducting each employee’s National Insurance contributions from their wage or salary, an employer is required to pay the employer’s National Insurance contributions for each employee too. The amount payable for each employee is linked to the size of their earnings and it is paid to HMRC.

Employer’s National Insurance contributions are therefore an employment tax. They are not deducted from the employee’s gross pay, but are an additional payroll cost to the employer, borne by the employer rather than the employee.

So if you ever wondered why so much of your paycheque disappears before you even get your hands on it… Now you know!