What are national insurance contributions?

In the United Kingdom, an individual pays national insurance contributions (NICs) to qualify for certain contributory benefits, such as maternity allowance, and to receive a state pension. The majority of these contributions from Great Britain are paid into the National Insurance Fund and kept separate from all other revenue raised by taxes. The proceeds are then used to pay social security benefits and the state pension. A separate, smaller fund operates for Northern Ireland, which may be topped up if there are shortfalls.

In addition, a proportion of NIC receipts contribute towards funding the National Health Service (NHS). The Government Actuary’s Department provides analysis, modelling and advice on public sector finances. It has projected that NICs will provide approximately £138 billion in revenue in the 2020/21 tax year in Great Britain. This estimate takes into account the impact of the coronavirus pandemic. Around £26.3 billion of this will be earmarked for the NHS.

NICs are mandatory if an individual is over 16 years of age and either:

  • an employee currently earning over £183 per week (the primary threshold); or
  • self-employed and currently making a profit of at least £6,475 a year (the small profits threshold).

The NIC class that a person pays is dependent on an individual’s employment status and how much they earn. The NIC classes are as follows:

Class 1

Employees are liable to pay class 1 NICs on their earnings between the primary threshold and the upper earnings limit (currently £962 per week). Between these thresholds, they are required to pay an NIC rate of 12 percent. For earnings above £962 per week, NICs are payable at a reduced rate of 2 percent.

Employees also accrue entitlements to contributory benefits between the lower earnings limit (currently £120 per week) and the primary threshold. Between these levels, a zero rate of NICs is charged and notional contributions are deemed to have been collected.

Employers pay secondary class 1 NICs, known as employer contributions, at a rate of 13.8 percent on earnings above the secondary threshold (currently £169 per week). In addition, employers pay class 1A or 1B NICs directly on an employee’s expenses or benefits.

Classes 2 and 4

These classes are paid by self-employed individuals, dependent on their annual profit contributions. Self-employed people earning more than the small profits threshold are liable to pay class 2 NICs at a current rate of £3.05 per week.

In addition, if an individual’s profits are above the lower profits limit (currently £9,500 a year), they are liable to pay class 4 NICs. These are payable at a rate of 9 percent on profits between £9,501 and £50,000, and at a reduced rate of 2 percent on profits above that threshold.

Class 3

 Class 3 NICs are voluntary payments which an individual may be entitled to make to ensure that they qualify for certain benefits, such as bereavement benefits. Class 3 NICs are paid at a flat rate, currently £15.30 per week.

What do the regulations do?

On 18 January 2021, the draft Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2021 were laid before Parliament under the draft affirmative procedure. They must be approved by both Houses before they can be brought into force. If approved, the instrument would enter into force on 6 April 2021.

The draft regulations would give effect to the annual re-rating of several NIC rates, limits and thresholds for the purpose of calculating the different class NICs for the tax year beginning 6 April 2021. Some of the proposed changes to NIC rates and thresholds are detailed in the table below:

Table one: NIC rates, limits and thresholds (difference in brackets)

NIC Class Rate in 2020/21 Proposed rate from April 2021
Class 1
Lower earnings limit £120 a week £120 a week (–)
Upper earnings limit £962 a week £967 a week (£5)
Primary threshold £183 a week £184 a week (£1)
Secondary threshold £169 a week £170 a week (£1)
Upper secondary threshold for under 21 age   group £962 a week £967 a week (£5)
Upper secondary threshold for relevant apprentices £962 a week £967 a week (£5)
Primary (employee)
On earnings between the primary threshold and UEL 12 percent 12 percent (–)
On earnings above the UEL 2 percent 2 percent (–)
Secondary (employer)
On all earnings above the secondary threshold 13.8 percent 13.8 percent (–)
Class 1A and Class 1B
Contribution rate (employer only) 13.8 percent 13.8 percent (–)
Class 2
Flat-rate contribution £3.05 a week £3.05 a week (–)
Small profits threshold £6,475 a year £6,515 a year (£40)
Class 3
Flat-rate contribution £15.30 a week £15.40 a week (10p)
Class 4
Lower profits limit £9,500 a year £9,568 a year (£68)
Upper profits limits £50,000 a year £50,270 a year (£270)

Under section 141 of the Social Security Administration Act 1992, HM Treasury is required to conduct a review into the general level of earnings in Great Britain every tax year. According to the department, the review takes into account changes in the level of earnings since the last review “with a view to determining whether legislation should be made under that section to determine the rates and thresholds applying to class 2, 3 or 4 NICs for the following tax year”. HM Treasury argues that the instrument “satisfies the requirement” for such legislation.

In addition, the draft regulations allow for grant payments not exceeding 17 percent of the estimated benefit expenditure for the 2021/22 tax year to be made into the National Insurance Fund if necessary.

Report by the Government Actuary

On 19 January 2021, the Government Actuary’s Department published a report into the impact that the draft regulations would have on the National Insurance Fund. In the report, the department estimated that the effect of the measures proposed would be a decrease in contribution income in 2021/22 of £0.2 billion. This is due to the changes and limits in thresholds on expected class 1 contributions.

As a condition of laying legislation under section 141 of the 1992 act, a report by the Government Actuary’s Department is laid before Parliament. If legislation is made under the act, a corresponding provision for Northern Ireland can be made under section 129 of the Social Security Administration (Northern Ireland) Act 1992.

What parliamentary scrutiny has there been so far?

On 27 January 2021, the draft regulations were considered by the Joint Committee on Statutory Instruments and were not reported.

The House of Lords is due to debate the draft regulations on 8 February 2021. No date has yet been scheduled for a debate in the House of Commons.

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Cover image from pxhere.