What does National Insurance pay for?

You would be hard-pressed to find anyone that actually likes paying taxes. Many Libertarians would even argue that taxation is theft. However, tax serves a crucial purpose in the health and safety of society. This is especially important in the UK as taxes fund the entire healthcare system.

It is both surprising and unsurprising that UK citizens know so little about the tax system. The tax system is so streamlined people barely think about it. For example, unlike in the US, VAT is pre-added to products, meaning citizens do not have to calculate taxes on top of their shopping bills. Most people also will not have to fill out a Self Assessment tax return. This is because employees will have Income Tax, and national insurance contributions deducted from their wages for them by employers.

It is only self-employed people that calculate their own Income Tax and National Insurance contributions. As this is not taught in the curriculum the self-employed will have to teach themselves or hire an accountant. Luckily there are online tax calculators people can use, but it does show a disconnect between citizens and their taxes.

Not only can it be tricky to find out how to pay contributions, but it is often not clear where the money is spent. This article will explain what exactly National Insurance is used for.

What are the National Insurance classes?

Tax classes are used to decide when and how a person makes National Insurance payments. Class 1 National Insurance contributions are for employees who earn more than £190 a week and are under the state pension age. Class 1 contributions are automatically deducted by your employer. Class 1A or 1B are paid by employers directly on their employee’s expenses or benefits.

Class 2 National Insurance is paid by self-employed workers earning more than £6,725 in profits per tax year. However, some people choose to make voluntary contributions if they make less than this per year.

Class 3 is used to categorise voluntary National Insurance contributions. Class 4 national insurance contributions are paid by self-employed workers earning £9,881 or more per tax year.

Where do National Insurance contributions go?

National Insurance contributions go into a national pot. From here the government can pay out certain benefits. Class 1 contributions got towards all benefits, namely:

• Basic State Pension
• Additional State Pension
• New State Pension
• Contribution-based Jobseeker’s Allowance
• Contribution-based Employment and Support Allowance
• Maternity Allowance
• Bereavement Support Payment

Class 2 contributions do not go towards Additional State Pension or Contribution-based Jobseeker’s Allowance. On the other hand, class 3 contributions only go towards Basic State Pension and New State Pension.

What are the National Insurance rates?

If you earn £190 to £967 a week as an employee you will pay a rate of 13.25% in class 1 contributions. Married women or widows, who opted into the small stamp scheme pre-1977 will pay a reduced rate of 7.1%. If you earn over £967 a week you will pay national insurance at a rate of 3.25%.

Class 2 contributions are paid at a rate of £3.15 a week if you earn more than £6,725 a year on profits. Class 4 National Insurance contributions are 10.25% on profits between £9,881 and £50,270. If a person earns profits of more than £50,270 then 3.25% tax is applied to further profits.

Class 2 and 4 National Insurance contributions are paid by Self Assessment tax return. However, a number of self-employed people do not have to pay National Insurance. This includes:

• Examiners, moderators, invigilators, and people who set exam questions
• People who run businesses involving land or property
• Ministers of religion who do not receive a salary or stipend
• People who make investments for themselves or others - but not as a business and without getting a fee or commission

What are voluntary contributions?

To avoid or make up for any gaps in your National Insurance record you may wish to pay voluntary contributions. Gaps can accrue when:

• you had low earnings as an employee
• you were unemployed but did not claim state benefits
• you were self-employed, but small profits meant you did not pay National Insurance
• You lived or worked outside the UK

Not paying enough national insurance means when you reach the state pension age, you may not receive a state pension. It may also mean you are not entitled to other benefits. Making voluntary contributions can help avoid this.

How are UK taxes spent by the government?

Below is a graph supplied by Gov.uk showing exactly how taxes are spent by the UK government. As you can see the largest portion of tax is spent on national health at £219.4 billion. Welfare (state benefits) excluding pensions receives £196.0 billion each year also.

Tax summary description	Description of PESA source (See PESA Table 5.2)	Public Sector Expenditure (£bn)	%
Health	Health	219.4	21.9
Welfare	‘Social Protection’ excluding state pensions	196.0	19.6
Business & Industry	Economic Affairs, without Transport	143.8	14.4
State Pensions	Within ‘Social Protection’	101.2	10.1
Education	Education	96.1	9.6
Transport	Economic Affairs, without Business and Industry	45.1	4.5
Defence	Defence	44.6	4.5
National Debt Interest	Within General Public Services	41.5	4.1
Public Order & Safety	Public Order & Safety	38.6	3.9
Government Administration	Captured under General Public Services	20.2	2.0
Housing and utilities (e.g. street lights)	Housing & Community Amenities	13.9	1.4
Environment	Environment protection	12.6	1.3
Culture (e.g. sports, libraries, museums)	Recreation, Culture & Religion	12.3	1.2
Overseas Aid	Captured under General Public Services	8.6	0.9
UK Contributions to EU budget	EU Transactions	5.8	0.6

National Insurance Summary

How much National Insurance you need to pay depends on your pay class. This depends on your employment status, whether you are employed or an employer, or a sole trader. A person's pay class starts at class 1 and ends at class 4.

If you are in a class 1 pay class you will pay towards all relevant benefits such as:

• Basic State Pension
• Additional State Pension
• New State Pension
• Contribution-based Jobseeker’s Allowance
• Contribution-based Employment and Support Allowance
• Maternity Allowance
• Bereavement Support Payment

Class 3 and class 4 contributions go towards different benefits.

Much like Income Tax how much you pay in National Insurance is decided by your pay bracket. These are:

• Class 1, earning £190 to £967 a week - 13.25%
• Class 1, earning over £967 a week - 3.25%
• Class 2, earning over £967 a week - £3.15 a week
• Class 4, profits between £9,881 and £50,270 - 10.25%
• Class 4, profits of more than £50,270 - 3.25%

If a person has had gaps in paying their National Insurance, they may wish to make voluntary National Insurance contributions. Among other things this ensures you maintain your State Pension entitlement.