National Insurance Explained
National Insurance contributions (NICs) are a form of tax paid by workers and employers in the UK. They fund the State Pension, Statutory Sick Pay, Maternity Allowance, and other state benefits. NICs are separate from income tax, although both are collected by HMRC.
Your NIC record determines your entitlement to certain benefits and your State Pension. Someone whose National Insurance record started after April 2016 normally needs 35 qualifying years for the full new State Pension; transitional rules apply to earlier records.
Classes of National Insurance
There are several classes of NICs, each applying to different groups:
| Class | Who Pays | How Collected |
|---|---|---|
| Class 1 (employee) | Employees earning above the Primary Threshold | Deducted through PAYE |
| Class 1 (employer) | Employers on employee earnings above the Secondary Threshold | Paid by employer alongside PAYE |
| Class 1A | Employers on benefits in kind | Annual payment to HMRC |
| Class 1B | Employers on items in a PAYE Settlement Agreement | Annual payment to HMRC |
| Class 2 | Voluntary payments by eligible self-employed people with profits below the Small Profits Threshold | Through self-assessment |
| Class 3 | Voluntary contributions to fill NIC gaps | Paid directly to HMRC |
| Class 4 | Self-employed with profits above the Lower Profits Limit | Through self-assessment |
Class 1: Employee and Employer NICs
How employee contributions work
Employee Class 1 NICs are charged on earnings in two bands:
| Earnings band | How it is charged |
|---|---|
| Up to the Primary Threshold | No employee NICs |
| Between the Primary Threshold and the Upper Earnings Limit | The main employee rate |
| Above the Upper Earnings Limit | A lower additional rate |
The Primary Threshold has been aligned with the income tax personal allowance on an annual basis, so most employees start paying NICs at about the same point as they start paying income tax. Payroll software applies the weekly or monthly equivalent of each threshold to every pay period.
How employer contributions work
Employers pay secondary Class 1 NICs at a single rate on each employee’s earnings above the Secondary Threshold. There is no upper limit, so the employer pays the same rate on every pound above the threshold.
The rates and thresholds for both employees and employers are set by the government, usually announced at the Budget and applied from 6 April. GOV.UK publishes the current figures under National Insurance rates and category letters.
Employer NICs are an additional cost on top of the employee’s salary. They are a tax-deductible expense for the employer when calculating corporation tax or income tax.
Reduced Thresholds for Certain Employers
Some employers benefit from higher secondary thresholds, meaning they pay no employer NICs until the employee earns more. The higher thresholds apply to:
- Employees under 21, up to the Upper Secondary Threshold
- Apprentices under 25, up to the Apprentice Upper Secondary Threshold
- Veterans in their first year of civilian employment, up to the Veterans’ Upper Secondary Threshold
- Freeport and Investment Zone employees, up to the Freeport and Investment Zone Upper Secondary Threshold, for eligible employers
Each relief uses its own NIC category letter in payroll, so the software can apply the right threshold.
Class 2 and Class 4: Self-Employed NICs
Self-employed people may have Class 2 credits or voluntary payments and may pay Class 4 through their self-assessment tax return.
Class 2 NICs
Since 6 April 2024, self-employed people no longer have to pay Class 2 NICs:
- If profits are at or above the Small Profits Threshold, Class 2 is treated as paid, so the year still counts towards the State Pension and no payment is due
- If profits are below the Small Profits Threshold, eligible people can choose to pay voluntary Class 2 at a flat weekly rate to protect their National Insurance record
- Voluntary Class 2 is paid through the self-assessment return and is much cheaper than Class 3
Class 4 NICs
Class 4 NICs are charged on taxable self-employed profits:
| Profits band | How it is charged |
|---|---|
| Up to the Lower Profits Limit | No Class 4 |
| Between the Lower Profits Limit and the Upper Profits Limit | The main Class 4 rate |
| Above the Upper Profits Limit | A lower additional rate |
The Lower and Upper Profits Limits normally match the personal allowance and the higher rate threshold. Class 4 does not itself build entitlement to benefits; the State Pension year comes from Class 2 being treated as paid or paid voluntarily. Current self-employed rates and limits are published on GOV.UK under Self-employed National Insurance rates.
Class 3: Voluntary Contributions
Class 3 NICs are voluntary payments that can fill gaps in your National Insurance record. Class 3 is charged at a flat weekly rate that is set each tax year. You can usually go back and fill gaps for the previous 6 tax years.
Voluntary contributions are worth considering if:
- You have gaps in your NIC record that will reduce your State Pension
- You were living or working abroad
- You were not working and not claiming benefits
- You were self-employed with profits below the Small Profits Threshold
Class 1A and 1B: Employer-Only Contributions
Class 1A
Employers pay Class 1A NICs at the employer Class 1 rate on the value of most benefits in kind provided to employees. These include company cars, private medical insurance, and other taxable perks reported on forms P11D.
Class 1A is due by 22 July following the tax year (or 19 July for postal payments).
Class 1B
Class 1B NICs apply to items included in a PAYE Settlement Agreement (PSA). A PSA allows employers to settle the tax and NICs on minor, irregular, or impractical benefits on behalf of employees. The rate matches Class 1A.
Employment Allowance
Eligible employers can claim the Employment Allowance to reduce their employer Class 1 NIC bill by a fixed annual amount set by the government. Since April 2025, employers whose previous year’s employer NICs were £100,000 or more are no longer excluded, but a company where the only employee paid above the secondary threshold is also a director still cannot claim. See the Employment Allowance guide for the conditions.
The allowance is claimed through the Employer Payment Summary (EPS) as part of the PAYE reporting process.
NICs and the State Pension
Your National Insurance record directly affects your State Pension entitlement:
- New State Pension (for those reaching State Pension age from 6 April 2016): the full weekly rate is increased each April and published on GOV.UK
- A record starting after April 2016 normally needs 35 qualifying years for the full amount; earlier records use transitional calculations
- You need at least 10 qualifying years to get any State Pension
A qualifying year is one in which you:
- Paid or were treated as having paid enough NICs
- Received National Insurance credits (for example, while claiming certain benefits or caring for a child under 12)
NICs and IR35
Contractors working through personal service companies must be aware of IR35 rules. If a contract is caught by IR35, the worker must pay employee NICs on deemed employment income, and the fee-payer must pay employer NICs. This significantly increases the total tax burden compared to paying dividends from a limited company.
Directors’ NICs
Company directors have their NICs calculated on an annual basis rather than period by period. This means the annual thresholds and limits apply to total earnings for the year, regardless of how they are paid. Alternatively, employers can choose to operate NICs on a per-period basis using the alternative method.
Record Keeping
You can check your National Insurance record online through your Personal Tax Account on GOV.UK. This shows:
- How many qualifying years you have
- Any gaps in your record
- Whether you can pay voluntary contributions to fill gaps
- Your projected State Pension amount
Employers must keep NIC records as part of their payroll records for at least 3 years after the end of the tax year, maintaining proper accounting records as required by HMRC.