Managing my money for young adults
Managing my money for young adults

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Managing my money for young adults

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, at £143 billion in 2019/20 – around 23% of all government receipts (Gov.UK, 2020).

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 2020/21 there was a primary threshold of £9500 per year and an ‘upper earnings limit’ of £50,000. 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

Timing: Allow about 15 minutes

How much Income Tax and National insurance would be paid by someone earning £26,000 in 2020/21?

The Income Tax-free allowance for the year was £12,500 and the rate of tax on incomes above this (and up to £50,000) was 20%. Information about NICs is given above.

If you find it helpful, work out your answer using the following process.

Income from employment or pension£26,000
Minus personal allowance£
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Leaves taxable pay of£
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Basic rate %
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on £
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£
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Tax to be paid in the year 2020/21£
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Income from employment or pension £26,000
Threshold for paying National Insurance contributions (NICs)£
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NICs %
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on £
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£
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NICs to be paid in the year 2020/21£
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Words: 0
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Feedback

Income from employment or pension£26,000
Minus personal allowance£12,500
Leaves taxable pay of£13,500
Basic rate 20%on £13,500£2700
Tax to be paid in the year 2020/21£2700
Income from employment or pension £26,000
Threshold for paying National Insurance contributions (NICs)£9500
NICs at 12%on £16,500£1980
(£26,000 minus the threshold of £9500)
NICs to be paid in the year 2020/21£1980
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