What Is National Insurance and How Does It Work?
- Kyle Randall
- Jan 6
- 3 min read
Understanding National Insurance Contributions (NICs)
National Insurance (often shortened to NI) is one of the most common deductions from income in the UK, yet many people aren’t fully sure what it is or how it works.
Whether you’re employed, self-employed, or a company director, National Insurance affects how much you take home and what benefits you’re entitled to. In this guide, we explain what National Insurance is, who pays it, how much it costs, and how it differs depending on your situation.
What Is National Insurance?
National Insurance is a tax paid to HMRC that helps fund state benefits such as:
The State Pension
Maternity Allowance
Certain sickness and disability benefits
Your National Insurance record also helps determine whether you qualify for the full State Pension in the future.
Who Pays National Insurance?
You usually pay National Insurance if you are:
Employed
Self-employed
A company director earning a salary
The type and amount of NI you pay depends on how you earn your income.
National Insurance for Employees
If you’re employed, National Insurance is deducted automatically through PAYE.
You’ll usually pay Class 1 National Insurance based on your earnings above certain thresholds. Your employer also pays separate employer National Insurance on top of your salary.
You don’t need to register separately — this is handled through payroll.
National Insurance for the Self-Employed
If you’re self-employed, National Insurance works differently.
You may pay:
Class 2 National Insurance (a flat weekly amount)
Class 4 National Insurance (a percentage of your profits)
These are calculated and paid through your Self Assessment tax return.
You can learn more about how Self Assessment works on our Self Assessment services page.
Do Company Directors Pay National Insurance?
Yes — company directors usually pay National Insurance through payroll on their salary.
Many directors choose to take a low salary and the rest of their income as dividends, which are not subject to National Insurance. This is a common tax-planning approach, but it must be structured correctly.
How Much National Insurance Do You Pay?
How much NI you pay depends on:
Your income
Whether you’re employed or self-employed
Your age
Your employment status
Rates and thresholds can change each tax year, so it’s important to keep up to date.
👉 Official guidance on National Insurance rates and thresholds can be found here:https://www.gov.uk/national-insurance
What Happens If You Don’t Pay National Insurance?
If you don’t pay enough National Insurance contributions, it can affect:
Your entitlement to the State Pension
Eligibility for certain benefits
In some cases, you may be able to make voluntary National Insurance contributions to fill gaps in your record.
National Insurance vs Income Tax
Although they’re often grouped together, National Insurance and Income Tax are separate.
Income Tax is based on your taxable income
National Insurance is based on earnings and employment status
You can pay one without paying the other, depending on your income level.
How VIP Accounting Ltd Can Help
At VIP Accounting Ltd, we help individuals, sole traders, and company directors across Benfleet, Essex and the UK with:
Understanding National Insurance obligations
Calculating NI correctly
Filing Self Assessment tax returns
Structuring income efficiently
Ongoing tax planning and compliance
If you’re unsure whether you’re paying the right amount of National Insurance, speak to our team via our contact page. https://www.vipaccounting.co.uk/contact-us
FAQs
Do I pay National Insurance if I earn under the personal allowance?
You may still pay National Insurance even if you don’t pay Income Tax, depending on your earnings.
Do dividends count towards National Insurance?
No — dividends are not subject to National Insurance.
Can I stop paying National Insurance?
Once you reach State Pension age, you usually stop paying NI.
Is National Insurance mandatory?
Yes — if you earn above certain thresholds.
Who Wrote This Article
Kyle Randall, Founder of VIP Accounting Ltd, provides clear, practical guidance to help individuals and business owners understand UK tax rules and stay compliant with HMRC.
VIP Accounting Ltd is a strategic accounting and tax advisory firm based in Benfleet, Essex, supporting individuals and businesses across the UK with National Insurance, Self Assessment, tax planning, and HMRC compliance.
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