National Insurance - How it works
National Insurance - How it works
Who pays National Insurance Contributions (NIC)?
National Insurance Contributions are paid by employers, employees and the self-employed. Employees and the self-employed are liable to pay NIC from the age of 16 to state pension retirement age.
Class 1 NIC: paid by employees and employers
Class 1 National Insurance Contributions are charged on earnings, and generally follow the same rules as for income tax - but there are some quirks to be aware of.
- Tips are liable to Class 1A NIC and ‘readily convertible assets’, such as shares or securities, are liable to Class 1 NIC.
- Payments not derived from employment are not liable to NIC – for example, commercial rent or dividends.
- A credit to a director’s loan account will not be liable to NIC if it represents dividends, but will be liable if it represents earnings.
What is the National Insurance threshold?
The thresholds for employers and employees paying NIC are based on weekly or monthly earnings.The primary monthly threshold at which employees start paying NIC is £1,048 for 2024/25 and 2025/26.
There is an upper threshold – the Upper Earnings Limit - above which all employees pay a lower rate of NI of £4,189 a month. Get the full table of recent NI rates.
The monthly threshold at which employers start paying NIC is £417 for 2025/26.
Primary Class 1 National Insurance
Employees pay primary Class 1 NIC on all earnings above the primary threshold (£242 per week/£1,048 per month in 2025/26). The main rate of 8% is paid to the upper earnings limit (£967 per week/£4,189 per month). The additional rate at 2% is paid thereafter.
Once an employee is of state pension age, they are no longer liable for primary Class 1 NIC, but the employer liability remains.
Secondary Class 1 National Insurance
Employers pay secondary Class 1 NIC on all earnings above the secondary threshold (£417 per week / £5,000 per annum in 2025/26) at 15%. There are some concessions available, including for employees in Freeports and Investment Zones.
The secondary threshold will remain at £5,000 per annum until 5 April 2028, then will increase in line with CPI.
The reduction in the secondary threshold in 2025/26 represents an increase of just under £900 Class 1 NIC per employee on an average worker’s total pay as published by the ONS on 1 October 2024. Together with the uplift in the National Living Wage from April 2025, this represents a significant rise in costs for employers.
The Employment Allowance increased in April 2025 from £5,000 to £10,500. Employers will no longer need to have incurred a secondary Class 1 NIC liability of less than £100,000 in the prior tax year in order to claim. The allowance will benefit larger businesses even if the saving will only offset a very small fraction of the increased overall cost to employers.
The increase in NIC makes salary sacrifice arrangements more attractive for employers as part of their overall remuneration packages for employees. This is especially true as there remains no employer’s NIC charge on pension contributions and the reduced BIK charge for Electric Vehicles is being extended to 2030.
Class 1A and 1B NIC
Class 1A and Class 1B NICs are generally paid by employers at the secondary rate (i.e. 15%). Class 1A applies to benefits in kind, termination payments and sporting testimonials. Read more about mandatory payrolling of benefits in kind from April 2027.
Class 1B also applies to any amounts included in a PAYE settlement agreement.
NIC for statutory directors
Statutory directors have an annual earnings period, and so when there are in-year rate changes, an average rate applies for the year. Find out details of the recent NIC rate changes.
NIC savings
If an employee enters a valid salary sacrifice arrangement, then they can save on Class 1 NIC. Common arrangements include pension contributions, childcare, bicycles and electric vehicles.Class 2 and 4 NIC: paid by the self-employed
Class 2 NIC preserves the entitlement to contributory benefits including the state pension. Since April 2024, if you have earnings over the small profits threshold, £6,845 for 2025/26, you are not required to pay Class 2 NIC to maintain entitlement to these benefits. If you have profits less than £6,845, you can choose to pay Class 2 voluntarily at £3.50 per week for 2025/26.
For 2025/26, Class 4 NIC is charged at 6% on profits between the lower profit limit of £12,570 and the upper profit limit of £50,270 and 2% on profits thereafter. Class 4 NIC is paid annually through self-assessment (and is included in payments on account).
Non-UK residents and property landlords do not pay Class 4 NIC. However, sleeping and inactive partners remain liable on their profit share.
Sideways loss relief claimed for income tax purposes is carried forward for Class 4 NIC to be used against future profits.
National Insurance Annual Maxima
If an employee has more than one job or is also self-employed, they could end up paying more NIC than someone with the same earnings from one job.
In these circumstances, an individual can carry out an annual maxima calculation and apply to HMRC for a refund. Alternatively, they can apply to HMRC for deferment so that the upper rate only (i.e. 2%) is applied on their second job to avoid overpaying NIC. At the end of the tax year, HMRC will issue a direct assessment if any further NIC is due.
Class 3 NIC
Voluntary NIC may be paid if an individual wishes to top up their entitlement to the state pension. It is charged at fixed weekly rate of £17.75 per week for 2025/26.
Got a question?
If you are an employer, or self-employed and you need advice on National Insurance, get in touch with our expert team, who will be happy to advise you.