National insurance: your questions answered

When you receive your pay packet at the end of April you'll be in for a shock: you will have to pay an extra 1% national insurance contributions from the start of the new tax year. It's been called the "hidden tax" because most people are not aware of the change. It will, however, make a difference to your take-home pay, particularly if you are at the top end of the salary scale.

So how much extra am I likely to have to pay?
According to figures from Barclays Personal Financial Services, someone on average earnings of ?24,164 will have to pay an extra ?195 per year. A worker earning ?30,000 a year will be ?254 per year worse off, and for someone on a salary of ?50,000, the cost will be ?454 extra per year.

From April 6 2003, national insurance contributions will rise to 11% on earnings above the ?89 per week threshold, from the current 10%. Above the upper earnings limit, which will increase in line with inflation in 2003-04, people will pay 1% in national insurance contributions. The upper limit for 2003-04 is ?30,940.

What exactly is National Insurance?
National insurance, or NI as it is often called, is a form of tax which everyone in work must pay in order to qualify for benefits, including the old age pension. By paying Class 1 contributions (which applies to people who are employed) you are entitled to incapacity benefit, jobseeker's allowance, maternity allowance, retirement pension and widows pension (if you meet the right qualifying conditions). For most people, NI is their contribution towards their state pension. NI is calculated on your gross pay (ie before income tax is deducted).

How much do I have to contribute to the NI scheme?
This depends on whether you are employed or self-employed. If you are employed you will be eligible for NI from age 16 (or whenever you start work) until you reach the state pension age.
If you are a member of an occupational scheme at work run by your employer you may have contracted out of Serps (the State Earnings Related Pensions Scheme). If you have contracted out you will pay a lower NI rate, as does your employer.

Why do National Insurance contributions have to rise?
Critics of the government claim that a rise in NI is a stealth tax - less controversial than a rise in income tax and little understood by the general population. Broadly speaking, governments introduce tax rises in order to meet spending commitments. Gordon Brown, the chancellor, needs more money from tax receipts to pay for the extra spending on schools and hospitals. He will raise an estimated ?4bn extra in 2003.

According to a report last month, taxes may have to rise by ?10bn a year by 2008 in order to allow the government to balance increased spending against lower growth. PriceWaterhouseCoopers says that this could be achieved either through increased national insurance contributions, or by raising VAT. It is also possible that Gordon Brown will consider putting an extra 1p on income tax in the Budget.

What happens if I am self-employed?
If you are self-employed you have to pay two sets of
NI. They are known as Class 2 (which give you rights to the state pension, maternity benefit, incapacity benefit and widows benefit) and Class 4 contributions (for which you receive no benefits).

Is there anything I can do to reduce the impact of the NI rise?
Unfortunately you can't avoid NI, but you can make better use of your take-home pay, either by investing in tax-efficient products like individual savings accounts (Isas) or by offsetting your savings against their mortgage in a flexible account.