Do you pay national insurance on your pension contributions?

Everyone is familiar with national insurance, a tax deducted either from your salary or from earned profits if you're self-employed. 

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 employed or self-employed. 

Currently, you start paying once you earn at least £242 a week, at a rate of 8% (this was recently cut from 10%).

If your earnings exceed £967 a week, you pay 2% on your weekly earnings above this threshold.  

If you’re self-employed, you pay Class 4 contributions, which are:

• 6% on your annual profits between £12,570 and £50,270.
• 2% on profits above this level. 

Self-employed workers will no longer pay Class 2 NI contributions.

These contributions are intended to increase your entitlement to 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 learn 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 NI contributions on your pension income, whether from the state pension, a workplace pension or a personal one. 

Once you reach the state pension age, you won’t have to pay national insurance on any earnings from work. This is 66 but will rise to 67 from 2026.

If you’re self-employed, you stop paying Class 4 NI contributions after the end of the tax year when you reach 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 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, but then you’ll have to pay income tax at a rate of 20% for between £12,571 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 tax rate 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% of each withdrawal will be taxed). 

How do you pay income tax on a pension? 

The state pension is £221.20 a week (£11,500 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.