National insurance contributions are paid by both employers and employees. By doing so employees are entitled to certain benefits, including the state pension. The amount you pay depends on how much you earn and whether you are self-employed or not.

What are the contributions for?

NI payments were introduced in 1911 to provide a safety net for workers who fall on hard times. NI is now used to pay for the NHS, sickness and disability allowances, the state pension and unemployment benefit. The revenue is ring-fenced and is meant to be only used for these areas. However, the government can borrow money from the NI fund to pay for other projects.

Your entitlement to some benefits depends on how much you, your spouse or civil partner have paid in contributions.

To receive the full basic state pension you need to have made a set amount of contributions for a certain amount of years. This is 30 years for both men and women. You can calculate what you will be entitled to on the government's State Pension profiler.

Other benefits that can in part be based on your NI contributions include jobseeker's allowance, incapacity benefit, employment and support allowance, widowed parents' allowance, and the bereavement payment. There are other benefits not based on your NI contributions, such as child benefit, working tax credit, pension credit, and carer's allowance.

Making contributions

Everyone who is aged between 16 and the state retirement age and earning over a certain level pays contributions. The different types of NI contributions are called "classes".

Employees pay class one contributions, which are equal to 11% of their earnings between £110 and £844 a week, and then 1% on earnings above £844 a week.

Contributions are deducted from wages by employers through pay as you earn (PAYE), in the same way as income tax. However, unlike income tax, which is based on your earnings across the year, employee NI contributions are based on the amount you are paid on each payslip.

It is possible to pay a lower amount if you are a member of your employer's contracted out pension scheme, but this means you will lose some entitlements. Married women and widows also used to be able to pay a reduced rate, however only those who have been doing this since before 1977 can now do this.

Employers also pay NI contributions, which are 12.8% on your earnings and the value of any benefits you get with your job, for example a company car.

NI for the self-employed

If you work for yourself you will be asked to pay two types of contributions: class two and class four.

Class two contributions are charged at a flat rate of £2.40 a week. Those earning less than £5,075 may be entitled to the small earnings exception, which means they do not have to pay this.

Class four contributions are charged on the profits from your business. The current rate for these contributions is 8% on annual taxable profits between £5,715 and £43,875, and 1% on any profits over this amount.

Voluntary contributions

People who want to top-up their contributions because they have not paid enough in a year to count for entitlement to some benefits can opt to do so. These voluntary payments are class three contributions.

You might choose to pay class three contributions if you have low earnings, are living abroad, or are not working. However, if you cannot work because you are ill or caring for someone you may qualify for NI credits to cover your contributions.

You are also counted as making contributions if you earn between £97 and £110 a week, even though you do not pay contributions.

Your NI number

Everyone working in the UK should have a NI number, which is used to make sure contributions are properly recorded. The unique reference number, which you keep for your whole life, is made up of a combination of letters and numbers in this style: AB 12 34 56 C. You will see it on official paperwork, such as a P60, payslip or annual tax return.

You should give it to your employer when you start work. It is also needed when you open an Isa, start claiming housing benefit or apply for a student loan.

If you live in the UK and your parents/guardians claim child benefit in your name, your NI card will be sent to you automatically before your 16th birthday. If you haven't received a number of need to apply for a number you can contact the National Insurance Registrations Helpline on 0845 915 7006. If you lose your card you can only receive one replacement in your lifetime, however you do not need to have a card as long as you know your number.