If you work in the UK, National Insurance (NI) is a tax you simply cannot afford to overlook. Whether you are an employer, an employee, or a sole trader, you need a clear grasp of the specific NI rules that apply to you. In this article, we will break down the fundamentals of UK National Insurance, examining everything from basic concepts to the differences between each NI Class.
What is National Insurance in the UK?
NI is a tax levied on earned income and profits from self-employment in the UK. Employees and the self-employed must pay this tax for future State Pensions and welfare benefits. For employers, NI functions as an employment tax associated with hiring employees.
Mandatory NI Eligibility
- Must be aged 16 or over.
- Must be working as an employee or running a business as a sole trader. (Employed & Self-employed).
Note: NI is charged on earned income. Bank savings interest, dividend income, and rental income from property are exempt from NI.
Nl Classes
NI is divided into 4 Classes, with specific conditions and tax rates as outlined below:
Class 1 NIC
Class 1 NIC is split into Class 1 Primary NIC (paid by employees) and Class 1 Secondary NI(paid by employers).
Class 1 Primary NIC (Employee NI)
Class 1 Primary NIC is paid by employees. Employers deduct it directly from employees’ salaries via PAYE and pay it over to HMRC. The tax rates vary depending on the earnings:
- Weekly earnings up to £242 (Annual £12,570): 0%
- Weekly earnings between £242 and £967 (Annual £12,570 to £50,270): 8%
- Weekly earnings above £967 (Annual £50,270+): 2%
Class 1 Secondary NIC (Employer NI)
Class 1 Secondary NIC is paid by employers as a form of employment tax. This is not deducted from employees’ salaries, but is instead paid directly by the employer when hiring their employees.
Key Thresholds & Rates:
- Secondary Threshold: Exceeding £5,000 per employee annually.
- NIC Rate: 15%
- Employment Allowance: Up to £10,500 annually.
[Class 1 NIC Example]
Employer A hires two part-time employees, B and C, on annual salaries of £10,000 and £20,000 respectively. Employees B and C are the only staff members of the business.
- Class 1 Primary NIC (Employee)
- B: Annual earnings are £12,570 or below, so NI is exempt (£0).
- C: (£20,000 − £12,570) × 8% = £594.40
(8% rate applies to the £12,570–£50,270 bracket)
- Class 1 Secondary NIC (Employer)
- Employee B: (£10,000 − £5,000) × 15% = £750
- Employee C: (£20,000 − £5,000) × 15% = £2,250
Total Employer Liability: £750 + £2,250 = £3,000
Since the total liability (£3,000) is less than the Employment Allowance (£10,500), the employer has £7,500 of allowance remaining.
Class 1A & Class 1B
If you run a business, you need to understand Class 1A and 1B. These are essentially specialized types of employer NI (Class 1 Secondary NIC) incurred when providing taxable benefits to employees. Both classes share a tax rate of 15%, but apply in different scenarios:
Class 1A
Class 1A is payable by employers when providing taxable benefits to employees, such as company cars or private medical insurance. These benefits must be reported annually via form P11D, and employers must pay 15% on the total value of the benefits provided.
(Note: Employees may also incur an additional 20–40% income tax charge on these benefits depending on their tax bracket.)
Class 1B
Class 1B applies when an employer pays tax on behalf of their employees for certain benefits or expenses through a PSA (PAYE Settlement Agreement) with HMRC. The employer reports these items via the PSA and pays a 15% Class 1B charge on them.
*Note: Employment Allowance cannot be offset against Class 1A NI or Class 1B NI liabilities.
Class 4 NIC – Self-Employed Profits Tax
Class 4 NIC is paid by the self-employed with annual profits exceeding £12,570.
Rates:
- £12,570 to £50,270: 6%
- Above £50,270: 2%
Class 4 NI is not linked to pensions or welfare benefits. However, if a sole trader generates profits of £7,105 or more, a Qualifying Year for State Pension is automatically credited in the HMRC system, which is an important point to keep in mind.
Class 2 NI – Self-Employed
Class 2 applies to self-employed individuals with earnings above the small profit threshold (£12,570).
- For sole traders with profits between £7,105 and £12,570, Class 2 is treated as having been paid (no payment required while qualifying years are preserved).
- If a sole trader’s profits fall below £7,105, they are not required to pay Class 2, nor do they have any obligation to do so.
However, if you wish to maintain your Qualifying Years for your State Pension, you can choose to pay Class 2 voluntarily.
Class 3 NI– Voluntary Contributors
Class 3 is paid voluntarily by individuals who cannot build up enough qualifying years through earnings or NI credits to claim the State Pension. If you currently have no income or do not qualify for NI credits, such as when taking a career break or living abroad, paying Class 3 NI voluntarily is an effective way to protect and build up your future State Pension entitlement.
Rate: £18.40 per week.
*NI Credits: NI credits are granted by the government to help individuals maintain their State Pension qualifying years during periods when they cannot work due to illness, maternity leave, childcare, or caregiving responsibilities. Eligibility depends on personal circumstances, so it is best to check the latest criteria on GOV.UK.
We have walked through the comprehensive overview of NI. If you are hiring staff or working in the UK, NI is one of the most vital taxes to understand.
BH1 Accounting is a UK Chartered accounting firm specializing in corporate accounting, offering expert tax consulting and financial services across various industries. If you need assistance with National Insurance, PAYE, Employer NI, or corporate tax matters, please feel free to reach out to us.