Welcome to the UK! Whether you’re here for work, study, or other reasons, understanding the financial system is crucial. Two key components of the UK’s financial landscape are National Insurance (NI) and taxes. If you’re new to the UK, particularly if you’re a Nepali student or worker, it’s essential to grasp how NI differs from tax, who should pay, and how to pay. This guide will provide clarity with detailed explanations, tables, and visual aids to help you navigate these concepts with ease.
What is National Insurance (NI)?
National Insurance (NI) is a system of contributions paid by workers and employers in the UK. It helps fund various state benefits such as pensions, unemployment benefits, and the National Health Service (NHS). NI contributions are mandatory and are typically deducted from your wages if you’re employed.
Key Features of National Insurance:
- Purpose: Primarily funds state benefits and pensions.
- Contribution: Deductions are based on your income.
- Eligibility: Contributions are required from individuals who earn above a certain threshold.
What is Tax?
Tax in the UK is a financial charge levied by the government to fund public services and infrastructure. Unlike NI, taxes are broader and cover income tax, VAT (Value Added Tax), and other forms of taxation.
Key Features of Tax:
- Purpose: Funds government services and public projects.
- Types: Includes income tax, corporation tax, VAT, and others.
- Application: Based on income, spending, and business profits.
Differences Between National Insurance and Tax
| Aspect | National Insurance (NI) | Tax |
|---|---|---|
| Purpose | Funds state benefits and pensions | Funds general government services |
| Contributors | Employees, employers, and self-employed individuals | Individuals, businesses, and entities |
| Types | Class 1, Class 2, Class 3, and Class 4 | Income tax, VAT, Corporation tax, etc. |
| Deductions | Based on income and employment status | Based on income, spending, and profit |
| Reporting | Done through payroll or self-assessment | Filed annually via tax returns |
Who Should Pay National Insurance?
Employed Individuals
If you’re employed, NI contributions are automatically deducted from your salary by your employer. Your employer is responsible for sending these contributions to HM Revenue and Customs (HMRC).
Self-Employed Individuals
If you’re self-employed, you need to pay NI contributions through the Self-Assessment process. There are two types of contributions:
- Class 2: A flat rate paid by all self-employed individuals.
- Class 4: A percentage of your profits, paid in addition to Class 2.
Example: Nepali Students in the UK
Consider a Nepali student named Priya, who is studying in the UK and working part-time. Priya’s employer will deduct NI contributions from her wages based on her earnings. Since Priya is employed, her NI contributions will be managed automatically through payroll.
Who Should Pay Tax?
Individuals
Income tax is applicable to all individuals earning above the personal allowance threshold. This includes:
- Employees
- Self-employed individuals
- Pensioners
Businesses
Corporation tax is paid by businesses on their profits. VAT is charged on goods and services and collected from consumers by businesses.
Example: Nepali Students and Tax
If Priya earns money from a part-time job, she will need to pay income tax based on her earnings exceeding the personal allowance. For students, if you’re earning more than the personal allowance, you’ll need to ensure you’re compliant with tax regulations.
How to Pay National Insurance and Tax
National Insurance
- Employed: NI contributions are automatically deducted from your salary by your employer.
- Self-Employed: Pay through Self-Assessment on an annual basis.
Tax
- Income Tax: Paid through PAYE (Pay As You Earn) for employees or Self-Assessment for the self-employed.
- VAT and Corporation Tax: Businesses handle these through periodic submissions to HMRC.
Top 10 FAQs About National Insurance, Tax, and HMRC
1. What is National Insurance (NI)?
National Insurance (NI) is a system of contributions paid by workers and employers to fund state benefits such as pensions, unemployment benefits, and the NHS. It is mandatory for those earning above a certain threshold.
2. How does NI differ from income tax?
National Insurance is specifically used to fund state benefits and pensions, while income tax is used to finance general government spending. NI is deducted based on earnings, whereas income tax is applied based on income levels and personal allowances.
3. Who needs to pay National Insurance contributions?
- Employees: Contributions are automatically deducted from wages by employers.
- Self-Employed: Individuals must pay Class 2 and Class 4 contributions through Self-Assessment.
- Employers: Must also contribute on behalf of their employees.
4. What are the different classes of National Insurance?
- Class 1: Paid by employees and employers.
- Class 2: Paid by self-employed individuals.
- Class 3: Voluntary contributions to fill gaps in NI record.
- Class 4: Paid by self-employed individuals based on profits.
5. What is the personal allowance for income tax?
The personal allowance is the amount you can earn before you start paying income tax. For the tax year 2024/2025, the personal allowance is £12,570. Earnings above this threshold are subject to income tax.
6. How do I register for Self-Assessment if I’m self-employed?
You can register for Self-Assessment online through the HMRC website. You’ll need to provide details about your business and personal information. Once registered, you’ll receive a Unique Taxpayer Reference (UTR) number.
7. What are the deadlines for paying tax and National Insurance?
- Income Tax: Self-Assessment tax returns are due by January 31st following the end of the tax year (April 5th).
- National Insurance: For employees, contributions are deducted monthly. Self-employed individuals pay Class 2 and Class 4 contributions on January 31st and July 31st.
8. How do I check my National Insurance contributions?
You can check your National Insurance contributions and record through your HMRC online account. You can also request a statement from HMRC to review your contribution history.
9. What should I do if I receive a tax bill from HMRC that I can’t pay?
Contact HMRC as soon as possible to discuss your situation. They may be able to arrange a payment plan or provide guidance on available options. It’s important to communicate with HMRC to avoid penalties.
10. How can I contact HMRC for help?
You can contact HMRC through various channels:
- Phone: Call the relevant HMRC helpline based on your query.
- Online: Use the HMRC contact form available on their website.
- Post: Write to the appropriate HMRC address for your inquiry.