National Insurance

Business, Legal & Accounting Glossary

Definition: National Insurance



Full Definition of National Insurance


National Insurance is a back door tax by the Treasury.

The money collected from income earners is used to pay for most social security benefits.

There are four types of National Insurance (NI) contributions.

Who pays what?

  • Class 1 Employers and employees (with earnings above the lower limit) pay this. The amount they pay is based on a segment of each person’s earnings (the segment is that income above the lower earnings limit and up to the upper earnings limit).
  • Class 2 Contributions are paid by the self-employed (but not those whose income is below a certain level.) This is a weekly flat rate and entitles the contributor most social security benefits but not unemployment, invalidity or widows pension.
  • Class 3 Contributions are voluntary. They are paid by those who do not earn enough to pay Class 1 or Class 2 contributions but would like to top up their benefit entitlement so that they can enhance the value of their state pension.
  • Class 4 Contributions are paid by the self-employed. They are paid as a fixed percentage of those profits which are chargeable to income tax and fall between the lower and upper earnings limits.

The self-employed receive no extra social security benefits for paying Class 4. It’s worth noting, however, the self-employed receive a modest amount of tax relief on Class 4 contributions.


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Definition Sources


Definitions for National Insurance are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 15th February, 2020 | 0 Views.