National Insurance explained

NICs fund the state pension

The National Insurance system pays for a number of benefits and the retirement pension.

Most people who work have to pay National Insurance contributions (NI) unless they are one of the groups who are exempt from the system.

A very important change comes into effect with the start of the new tax year on 6 April 2010.

From that point on, individuals will only need 30 years of full NI contributions to qualify for the state pension.

Before, men needed 44 years of contributions and women needed 39.

What you get

There are six types of NI, but which one will depend on someone's status, for example, whether they are employed, self-employed, not employed or an employer.

Payment of Class 1 contributions by employees gives them entitlement to the following benefits:

• the basic state pension

• the additional state pension

• jobseeker's allowance - the contribution-based element

• employment and support allowance - the contribution-based element

• maternity allowance

• and bereavement benefits - bereavement allowance, bereavement payment and widowed parent's allowance.

Self-employed

All employees are liable to pay Class I NI but the self-employed are liable to pay both Class 2 and Class 4 (which is paid on profits above a certain level).

NI contacts

Refunds Group, Revenue & Customs, National Insurance Contributions Office, Benton Park Road, Longbenton, Newcastle, NE98 1ZZ

NI Self employed helpline: 0845 9154655

Switchboard: 0191 213 5000

Payment of Class 2 contributions however does not bring entitlement to the additional state pension, or the contributions-based jobseeker's allowance.

If you are an employee but leave your work to become self-employed, you will then be liable to pay Class 2 NI for every week of self-employment as long as you fulfil the other key criteria of age and eligibility.

It is your responsibility to notify the Revenue of any relevant change in your employment status.

The self-employed pay the Class 4 NI on any profits between specified lower and upper limits. If they earn less than £5,075 (tax year 2010/2011) they do not have to pay NI at all.