4 Understanding National Insurance Contributions
The second important deduction from gross income is National Insurance Contributions (NICs). National Insurance is paid by employees and employers. Historically, it formed the basis for paying social security benefits related to unemployment, illness and retirement. It was first introduced in 1911 and gradually expanded, especially in the 1940s.
NICs from employers and employees make up the second largest single contribution to UK government receipts.
The mechanics of collection are that HMRC issues each person in the UK with a National Insurance account number against which contributions are recorded. The level of contributions influences entitlement to, and in some cases the level of, certain benefits.
As with Income Tax, the rules and regulations surrounding National Insurance change regularly. In 2023/24 there was a primary threshold of £12,570 per year. There was also an ‘upper earnings limit’ of £50,270. On income between these limits, employees’ National Insurance was levied at 12%. Any portion of income above the upper earnings limit was subject to only a 2% levy.
Have a go at using what you’ve learned about Income Tax and National Insurance Contributions (NICs) by trying some calculations for yourself.
Activity 3 Calculating tax and National Insurance
How much Income Tax and National insurance would be paid by someone earning £26,070 in 2023/24?
The Income Tax-free allowance for the year was £12,570 and the rate of tax on incomes above this (and up to £50,270) was 20%. NICs were charged at 12% above the income threshold of £12,570.
If you find it helpful, work out your answer using the following process.
| Income from employment | £26,070 | |
| Minus personal allowance | £ | |
| Leaves taxable pay of | £ | |
| Basic rate % | on £ | £ |
| Tax to be paid in the year 2023/24 | £ | |
| Income from employment £26,070 | ||
| Threshold for paying National Insurance Contributions (NICs) | £ | |
| NICs % | on £ | £ |
| NICs to be paid in the year 2023/24 | £ | |
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| Income from employment | £26,070 | |
| Minus personal allowance | £12,570 | |
| Leaves taxable pay of | £13,500 | |
| Basic rate 20% | on £13,500 | £2700 |
| Tax to be paid in the year 2023/24 | £2700 | |
| Income from employment £26,070 | ||
| Threshold for paying National Insurance Contributions (NICs) | £12,570 | |
| NICs at 12% | on £13,500 | £1620 |
| (£26,070 minus the threshold of £12,570) | ||
| NICs to be paid in the year 2023/24 | £1620 | |