Everyone is familiar with National Insurance, a tax deducted either from your salary or from earned profits.
You start paying contributions from the age of 16, and once you’re earning above a certain threshold, to ensure you can get the State Pension when you retire.
But when do you stop paying?
What is National Insurance?
National Insurance is a tax on your earnings, whether you’re employed or self-employed.
Currently, you start paying once you earn more than £242 a week, at a rate of 12%.
If your earnings go over £967 a week, you pay 2% on your weekly earnings above this threshold.
If you’re self-employed, you pay £3.45 each week and 9% on your annual profits of between £12,570 and £50,270, then 2% on profits above this level.
The purpose of these contributions is to build up your entitlement to a range of key benefits such as the State Pension.
So, if you do take any time out from work, it’s important to keep an eye on your National Insurance record to make sure you’re not falling short.
If you find any gaps, you can top them up by making voluntary contributions.
To find out more about the different classes of National Insurance, visit the government website.
Do you have to pay National Insurance on your pension?
No, you don’t pay National Insurance contributions on your pension income, whether it is from the State Pension, a workplace pension or a personal one.
You also won’t have to pay National Insurance on any earnings from work once you reach the State Pension age.
This is 66 but will rise to 67 in 2026. If you’re self-employed, you stop paying National Insurance in the tax year after you reach the State Pension age.
What about income tax?
Unfortunately, your pension isn’t completely tax-free.
You’ll have to pay income tax on a private and workplace pension when withdrawing from it.
While the State Pension is taxable, it’s usually paid without any tax deductions.
It works similarly to when you’re working.
So, you can enjoy up to £12,570 a year from your pension tax-free as a personal allowance, then you’ll have to pay income tax at a rate of 20% for between £12,751 and £50,270.
Above this amount, you’ll be in the higher-rate tax bracket of 40% (between £50,271 and £125,140) and from £125,140 upwards, the rate of tax is 45%.
There’s another thing to consider.
You get 25% of your pension tax-free, which many people take as a lump sum.
Alternatively, if you choose not to take the tax-free lump sum and withdraw it as income in smaller amounts, you could get 25% of each withdrawal tax-free (the remaining 75% will be taxed).
How do you pay income tax on a pension?
The State Pension is £203.85 a week (£10,600 a year), paid weekly before tax deductions.
As this is less than the personal allowance, you won’t pay any tax.
But with other pension income, your provider usually deducts any tax owed before paying you, so you won’t have to do anything.
If you are in any doubt about how much tax you owe, it’s a good idea to speak to a financial adviser.
They will be able to ensure you’re prepared so you can concentrate on a well-earned retirement.