Introduced in 1911, National Insurance (NI) is a system of contributions that is paid by employers and workers towards the cost of certain state benefits. These contributions are taken out of every workers salary and is used to fund the NHS. Unemployment benefit, Sickness and Disability allowances and the state pension.
If you are earning a salary that is above your yearly personal allowance of £11,000, then you will be required to pay both National Insurance contributions and Income tax.
If you are an employee of a company or business, and you earn more than £115 per week, then you must pay National Insurance on earnings above that amount. Past that you will then be required to pay 12% on any amount you earn up to £827. Any amount that you earn greater than £827 will be taxed at a rate of 2%. For example, if you were earning £1,000 per week, then you would be charged no National Insurance on the first £115. You would then be charged 12% on the next £827 and finally 2% on the remaining £173.
If your salary for the year is greater than your personal tax free allowance then your income tax and National Insurance contributions will be taken out of your salary before it is paid to you. These payments are made through the Pay as you Earn system (PAYE) where you are given a special tax code from HMRC that will correspond to the correct amount that you are required to pay. It is important to remember that it is completely your responsibility to make sure that you have the correct tax code and are paying the right amount of tax; not HMRCs or your employers. If you find that you have been paying too much tax then you can contact HMRC and receive a refund. If you find that you have been paying too little then you must contact them and pay the difference. Failure to do so can have serious consequences if left uncorrected.
The amount of income tax and National Insurance contributions that you make is based on which tax code you have. Every year HMRC will send out a notice that will inform you of what you code is and how much you will have to pay. This code can be found on your payslip and is usually made up of a few numbers and letters.
If you still have further questions about National Insurance, or if you would like to learn more about Accountant Chelsea, you can visit our homepage here for more information.