National Insurance#

National Insurance is a key component of the UK tax system. It primarily funds certain types of welfare and state benefits, including the State Pension. Here’s an overview of National Insurance:

NI has four main classes:

Class 1: Paid by employees and their employers. This is based on the employee’s earnings and is deducted directly from wages.
Class 2: Paid by self-employed people with profits above a certain threshold.
Class 3: Voluntary contributions, often made by people who want to fill gaps in their National Insurance record.
Class 4: Paid by self-employed people with profits above a certain threshold, in addition to Class 2 NICs.

Modelling#

PolicyEngine models each class separately, according to the table below.

	Class	Methodology & Basis	Thresholds & Limits	Rate Application	Reference
0	Class 1	Based on employment income. \n- Monthly and an...	Primary Threshold, Upper Earnings Limit	Main and Additional rates	Social Security Contributions and Benefits Act...
1	Class 2	Based on self-employment income. \n- Weekly fl...	Small Profits Threshold	Flat rate	Social Security and Benefits Act 1992 s. 11
2	Class 4	Derived from self-employment income minus Clas...	Lower Profits Limit, Upper Profits Limit	Main and Additional rates	Social Security and Benefits Act 1992 s. 15

Appendix#

The chart below shows all threshold parameters for each class of National Insurance.

from policyengine_uk.system import system
import plotly.express as px
from policyengine_core.charts import format_fig
from policyengine_core.parameters import Parameter

ni = system.parameters.gov.hmrc.national_insurance

threshold_parameters = [
    ni.class_1.thresholds.lower_earnings_limit,
    ni.class_1.thresholds.primary_threshold,
    ni.class_1.thresholds.upper_earnings_limit,
    ni.class_1.thresholds.secondary_threshold,
    ni.class_2.small_profits_threshold,
    ni.class_4.thresholds.lower_profits_limit,
    ni.class_4.thresholds.upper_profits_limit,
]
rate_parameters = [
    param
    for param in ni.get_descendants()
    if param not in threshold_parameters and isinstance(param, Parameter)
]

instants = [f"{2020 + i}-04-06" for i in range(0, 14)]

instant_values = []
values = []
is_thresholds = []
labels = []

for param in threshold_parameters:
    for instant in instants:
        instant_values.append(instant)
        values.append(param(instant))
        is_thresholds.append(True)
        labels.append(param.metadata.get("label"))

for param in rate_parameters:
    for instant in instants:
        instant_values.append(instant)
        values.append(param(instant))
        is_thresholds.append(False)
        labels.append(param.metadata.get("label"))

df = pd.DataFrame(
    {
        "Instant": instant_values,
        "Value": values,
        "Threshold": is_thresholds,
        "Label": labels,
    }
)

fig = px.line(
    df[df["Threshold"] == True],
    x="Instant",
    y="Value",
    color="Label",
)

fig.update_layout(
    title="National Insurance thresholds over time",
    # Put legend at bottom
    legend=dict(
        orientation="h",
        yanchor="bottom",
        y=-0.3,
        xanchor="right",
        x=1,
        title="",
    ),
)

fig.update_traces(
    line_shape="hv",
)

fig = format_fig(fig)
fig

The chart below shows all rate parameters for each class of National Insurance.