National Insurance - How it works

Who pays National Insurance Contributions (NIC)?

National Insurance Contributions (NIC) are paid by employers, employees and the self-employed. Employees and the self-employed are liable from age 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, however there are some quirks to be aware of.  

Tips are liable to Class 1A NIC and readily convertible assets are liable to Class 1 NIC.  

Payments not derived from employment are not liable to NIC, such as commercial rent or dividends.  

A credit to a director’s loan account will not be liable to NIC if it represents dividends, but is if it represents earnings.

Find out more about recent changes to Class 1 NICs.

 

Primary Class 1 NIC 

Employees pay primary Class 1 NIC on all earnings above the primary threshold (£242 per week in 2024/25 and 2025/26). The main rate of 8% is paid to the upper earnings limit (£967 per week). 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 NIC 

Employers pay secondary Class 1 NIC on all earnings above the secondary threshold (£175 per week / £9,100 per annum in 2024/25) at 13.8%. There are some concessions available, including for employees in Freeports and Investment Zones. 

From April 2025 the secondary Class 1 NIC rate will increase to 15%. In addition, the secondary threshold will reduce from £9,100 to £5,000 per annum until 5 April 2028 and will then increase in line with CPI. 

This measure will represent 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, this represents a significant rise in costs for employers.  

The Employment Allowance will increase 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 the employer’s NIC charge on pension contributions did not materialise 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. Class 1A applies to benefits in kind, termination payments and sporting testimonials. Class 1B 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. See here for 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 £6,725 you are not required to pay Class 2 NIC to maintain entitlement to these benefits. If you have profits less than £6,725, you can choose to pay Class 2 voluntarily at £3.45 per week for 2024/25.  

For 2024/25, 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 carries out an annual maxima calculation and can 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 where an individual wishes to top up their entitlement to the state pension. It is charged at fixed weekly rate of £17.45 for 2024/25 (£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. 

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