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National Insurance Contributions

You pay National Insurance contributions to build up your entitlement to a State Pension and other social security benefits. How much you pay depends on how much you earn. If you earn over a certain amount, your employer deducts Class 1 National Insurance contributions from your wages through the PAYE system.

You pay a lower rate of National Insurance contributions if you're a member of your employer's 'contracted-out' pension scheme, or you're a married woman - or widow - who holds a valid 'election certificate'.

Your employer also pays employer National Insurance contributions based on your earnings and on any benefits you get with your job for example a company car.

HMRC keeps track of your contributions through your National Insurance number. This is like an account number and is unique to you.

Everyone can earn a certain amount each year without paying any Income Tax. This is called your Personal Allowance. In 2010-11 the Personal Allowance is £6,475. Some people can earn a bit more before they start paying tax, if they're over 65, for example.

There are a number of other allowances and reliefs you may be able to claim to reduce your tax bill - and in some cases mean you've no tax to pay.

You can earn up to £110 a week (2010-11) before you pay any National Insurance contributions. This is known as the 'primary threshold'.

However, as long as you earn more than £97 a week (2010-11) you can still build up your entitlement to a State Pension and certain other benefits. This is known as the 'lower earnings limit'.

© SAFE Advice | 2010