National Insurance Explained
A simple guide to understanding what National Insurance is, how much you pay, and why it matters for your future.
National Insurance (often abbreviated as "NI") is one of the deductions you'll see on your payslip alongside income tax. While it might seem like just another tax, it's actually quite different - and understanding it is important for your financial future, particularly your state pension.
What is National Insurance?
National Insurance is a tax on your earnings that was created to fund social welfare programs. Unlike income tax (which goes into the general government budget), National Insurance has a more specific purpose.
Two Key Things National Insurance Does:
Your NI contributions help pay for the NHS, state pension, unemployment benefits, and maternity/paternity pay.
Paying NI builds up your record, which determines whether you're entitled to certain benefits, most importantly your state pension when you retire.
NI vs Income Tax: What's the Difference?
- • Only on earned income (salary, wages)
- • Builds entitlement to benefits
- • Lower rate at higher earnings
- • Stops at state pension age
- • Not paid on pension income
- • On all types of income
- • No specific benefit link
- • Higher rate at higher earnings
- • Paid at any age if earning
- • Paid on pension income
How Much Do You Pay?
As an employee, the amount of National Insurance you pay depends on how much you earn. Like income tax, it's calculated in bands, but the rates and thresholds are different.
Example 1: £25,000 Salary
Example 2: £60,000 Salary
Why Does NI Drop to 2%?
You might notice that National Insurance actually decreases from 8% to 2% once you earn above £50,270. This seems odd - shouldn't higher earners pay more?
Historically, the higher NI rate (8%) was linked to building up additional state pension benefits. Once your earnings went above £50,270, you stopped earning extra pension rights, so the rate dropped to 2%.
Although the pension system changed in 2016, the 2% rate was kept. The government's reasoning is that when combined with the 40% income tax rate that kicks in at the same level, the total tax rate (42%) is considered fair.
As your earnings increase beyond £50,270, NI becomes less of a burden as a percentage of your total salary. This is different from income tax, which increases at higher earnings.
How NI Builds Your State Pension
One of the most important reasons to pay National Insurance is that it builds your entitlement to the state pension - the money the government pays you when you retire.
To get any state pension at all
To get the maximum state pension
What Counts as a Qualifying Year?
- • Earning above £6,552 as an employee (even if you pay no NI)
- • Being self-employed and paying Class 2 NI
- • Receiving NI credits (when unemployed, on maternity leave, etc.)
- • Making voluntary contributions to fill gaps
Important Note:
You can earn between £6,552 and £12,570 and still get a qualifying year towards your state pension without paying any NI at all! This is called getting "credited" contributions.
When You Don't Pay National Insurance
Once you retire and start receiving a pension (either state or private), you don't pay National Insurance on it. You'll still pay income tax, but no NI. This is true even if you receive a very large pension.
Once you reach state pension age (currently 66, rising to 67), you stop paying National Insurance completely, even if you continue working and earning a salary. However, you still pay income tax.
NI only applies to earned income from employment or self-employment. You don't pay it on investment income like dividends, interest, or rental income (though you may pay income tax on these).
If you earn less than £12,570 per year (about £1047.50 per month), you don't pay any National Insurance. But if you earn above £6,552, you still get credit towards your state pension.
Employer National Insurance
It's worth knowing that your employer also pays National Insurance on your salary - but this doesn't affect your take-home pay.
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Employers pay 15% NI on your earnings above £5,000 per year. This is paid on top of your salary, so it doesn't come out of your pay.
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It's a cost of employing you: For a £40,000 salary, your employer pays about £5,250 in employer NI, making your total employment cost £45,250.
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You won't see it on your payslip: Employer NI doesn't appear on your payslip because it's not deducted from your pay.
Common Questions
You can check your National Insurance record online at gov.uk using your Government Gateway account. This shows how many qualifying years you have, your state pension forecast, and any gaps in your record that you could fill with voluntary contributions.
You can usually fill gaps by making voluntary Class 3 contributions (currently £17.45 per week for each missing year). You typically have up to 6 years to go back and fill gaps. This can be worth it if it increases your state pension.
Yes, but each job is assessed separately. This means you get the £12,570 threshold for each job, which can result in paying less total NI than if you earned the same amount in one job.
If you move abroad, you'll stop paying UK National Insurance (unless you're working for a UK employer temporarily posted abroad). You may be able to continue making voluntary contributions to maintain your UK state pension entitlement, or your new country's social security system may have a reciprocal agreement with the UK.
Calculate Your National Insurance
Use our free calculator to see exactly how much National Insurance you'll pay, along with income tax and other deductions.
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