National Insurance Contribution (NIC)

What is National Insurance Contribution (NIC)?

National Insurance Contribution (NIC) is the amount payable by employed individuals and employers to HM Revenue and Customs (HMRC) – the UK government’s non-ministerial department.

When initiated by the National Insurance Act 2011, it provided a kind of insurance benefits against unemployment and illness, and after some amendments, eventually included retirement pension.

All employed individuals above the age of 16 years are eligible to pay contributions if they receive an income above a threshold level – the value of which is reviewed regularly and is known as the Lower Earnings Limit (LEL).

The amounts are to be paid until the working person becomes eligible for the state pension. NIC forms a substantial portion of the revenue generated by the UK government. The majority of the amount received from the NIC goes to the National Insurance Fund (NIF). Around 90% of funds in NIF are utilized as a retirement pension.

Structure of National Insurance Contribution (NIC)

Primary Class 1 National Insurance Contribution (NIC)

The Primary Class 1 National Insurance Contribution (NIC) is payable by the employees if their earnings exceed the LEL. If the earnings are above LEL and below a primary threshold (PT), a zero rate of NICs is charged.

In such a case, the UK government credits employee contributions to make the low-income workers eligible for the benefits. The employees are charged NICs at a 12% rate if their earnings are above the PT and below the upper earnings limit (UEL). For earnings above UEL, a 2% NIC is charged. The value of all the threshold limits is reviewed periodically.

NIC was charged at a reduced rate earlier when there was a provision of an additional state pension. However, with the introduction of a single-tier state pension in April 2016, the rates are higher now.

Secondary Class 1 National Insurance Contribution (NIC)

The Secondary Class 1 National Insurance Contribution (NIC) is paid by employers at a 13.8% rate on employee earnings above a weekly value called secondary threshold (ST). A Class 1A or 1B at a 13.8% rate on employee benefits or expenses is also payable by employers.

For employees below 21, employers are not charged NIC if their earnings are below a limit known as the upper secondary threshold (UST). Employers are also exempt from NIC for new apprentices under the age of 25, for earnings below apprentice upper secondary threshold (AUST). The value of UST and AUST is aligned with the value of UEL.

Class 2 National Insurance Contribution (NIC)

The Class 2 National Insurance Contribution (NIC) is payable weekly by self-employed individuals at a fixed rate. A self-employed individual who’s earning an annual profit of less than a small profit threshold (SPT) can be exempt from Class 2 NIC payments.

In addition, a separate Class 4 NIC is needed to be paid by those who are self-employed. This Class 2 NIC contribution is profit-based and charged at 9% on profit level above an annual lower profits limit and below an upper annual profits limit. Above the annual upper-profit limits, NIC is charged at a 2% rate.

Class 3 National Insurance Contribution (NIC)

The Class 3 National Insurance Contribution (NIC) is a voluntary payment made by individuals to qualify for retirement pension and other benefits. The Class 3 category is charged weekly at a fixed rate.

Benefits of National Insurance Contributions

An employed individual who’s making NIC is entitled to certain benefits known as contributory benefits, which include the following:

1. Bereavement benefits

Bereavement benefits consist of the following payments and allowances:

• A one-time tax-exempt payment of 2,000 euros paid to a widow/widower if their deceased spouse met the NIC
• Bereavement allowance payable to a widow/widower widowed at or above 45 for 52 weeks or until the receiver reaches the age of retirement. The allowance amount is dependent on the eligibility of the claimant’s contributions and age.
• Allowance paid to the widowed parent having dependent children until they remain eligible to receive the child benefit.

2. Universal credit benefits

As legislated in the Welfare Reform Act 2012, six benefits – namely the Employment and Support Allowance, Income Support and Jobseeker’s Allowance based on income, Working Tax Credit, Child Tax Credit, and Housing Benefit – received by low-income households are combined into one payment.

They are monthly payments and the recipients must wait at least five weeks for the first payment.

3. Incapacity benefit or Statutory Sick Pay (SSP)

Individuals who are not working due to illness for more than four days and less than 28 weeks are eligible to receive Statutory Sick Pay (SSP) from their employer, given that the employee pays NIC.

If due to medical reasons the employee is unable to return to work after 28 weeks, the SSP no longer holds. However, the employee may still receive the Universal Credit Allowance.

4. State pension

Individuals who already reached the qualifying pension age are entitled to receive regular state pensions. The pension amount depends on the number of years the individuals made NIC payments and the allowances received by them when they were not working.

Anyone short of qualifying years can make Class 3 NIC to be entitled to the state pension.

More Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

• Normal Retirement Age (NRA)
• Pension Fund
• Personal Finance
• Insurance Expense
• See all wealth management resources