Whether you're responsible for overseeing employee payrolls or handling your own contributions, managing National Insurance contributions is a notoriously complicated and time-consuming process for employers and the self-employed.
National Insurance (NI) plays a vital role in the UK's tax system and serves as the second-largest revenue source for HMRC. The money generated through National Insurance contributions fund important government expenditures such as the National Health Service (NHS) and state pensions.
Accurate calculation and proper submission of National Insurance contributions (NICs) are essential to ensure that employees and self-employed individuals receive the benefits they are entitled to - but this often requires having a detailed understanding of NICs.
In this blog, you'll gain an understanding of the basics of National Insurance in the UK. We'll cover various aspects, including what National Insurance is, the different classes of contributions, and the rates and thresholds for employers, employees and the self-employed.
- National Insurance Basics Explained
- An Employers Guide to National Insurance Contributions
- Navigating National Insurance for the Self-Employed
National Insurance Basics Explained
What is National Insurance?
National Insurance is a tax on income and profits earned by individuals. Contributions are divided into different classes and paid by employees, employers, and the self-employed to support state benefits. The amount individuals pay is determined by government-set thresholds and rates, employment status, earnings, and other factors.
An Employer's Guide to National Insurance Contributions
Employer National Insurance is tax paid by employers on behalf of themselves and their employees. These contributions are paid to HMRC on a weekly or monthly basis - dependant on an employee's pay schedule. Failing to submit NICs on time or incorrectly can result in a penalty from HMRC and can affect an employee's rights to benefits.
Class 1 National Insurance contributions
Class 1 NICs apply to employees and their employers. It is the most common class and involves contributions from both parties. The contributions are based on the employee's earnings and are deducted automatically through the Pay As You Earn (PAYE) system. Employers are responsible for submitting these deductions to HMRC on a regular basis.
Employer vs. Employee NICs
Before receiving their pay, a portion of an employee's salary is automatically deducted by their employer and set aside for National Insurance contributions to be paid to HMRC - these are known as Employee National Insurance contributions.
In addition, employers must pay a separate contribution that doesn't directly affect an employee's take-home pay. These Employer National Insurance contributions represent an additional cost associated with maintaining a workforce which can have a ripple effect on a business's cash flow. It also requires a considerable amount of time and effort.
Employers bear the responsibility of overseeing the entire National Insurance process, which involves deducting and submitting both the employee and employer NICs.
Employer and Employee National Insurance rates and thresholds
Employer and employee National Insurance contributions are based on earnings, as well as, rates and thresholds that are set by the government and can change from year to year.
Employers need to stay updated with the current rates and thresholds to ensure they are deducting the correct amount from their employees' earnings. Similarly, employees should be aware of the rates and thresholds to understand how much they will need to contribute towards National Insurance.
Class 1 National Insurance Thresholds 2024/25
| Weekly | Monthly | Annually | |
| Low Earnings Limit | £123 | £533 | £6,396 |
| Primary Threshold * | £242 | £1,048 | £12,570 |
| Secondary Threshold ** | £175 | £758 | £9,100 |
| Upper Earnings Limit | £967 | £4,189 | £50,270 |
This is a summarised list of National Insurance thresholds. You can find the full list here.
* Employees begin paying National Insurance when they reach the Primary Threshold.
** As an employer, your National Insurance payments begin when your employee's earning reach the Secondary Threshold.
Class 1 Employer National Insurance Contribution Rates 2024/25
| 2024/2025 | 2023/2024 | |
| Threshold | Employer Rate | Employer Rate |
| Rate below the Secondary Threshold | 0% | 0% |
| Rate above the Secondary Threshold | 13.8% | 13.8% |
Class 1 Employee National Insurance Contribution Rates 2024/25 |
||
| 2024/2025 | 2023/2024 from 6 Jan | |
| Threshold | Employee Rate | Employee Rate |
| Between Primary Threshold & Upper Earnings Limit | 8% | 10% |
| Above Upper Earning Limit | 2% | 2% |
This is a summarised lists of National Insurance employer and employee rates. You can find the full list here.
Managing National Insurance as an employer
Managing National Insurance contributions involves two important steps that employers must follow: reporting and payment. These steps are crucial to maintaining compliance and ensuring the seamless operation of the NI system.
- Reporting to HMRC is a crucial part of the process. Employers will need to report the earnings and National Insurance contributions for each employee, which is typically done through the Pay As You Earn (PAYE) system. It's important to note that this information must be reported regularly, usually on or before each payday.
- Paying National Insurance contributions is a responsibility that falls on employers. They are responsible for deducting National Insurance contributions from the employee's salary and making their own contributions. These contributions must be paid to HMRC in a timely manner.
Navigating National Insurance for the Self-Employed
For self-employed individuals in the UK, it's important to understand the role of National Insurance. Similar to employers and employees, the self-employed are required to make NI payments to contribute to the state pension system and ensure eligibility for certain benefits such as Statutory Sick Pay (SSP) and Maternity Allowance.
To determine whether a self-employed person needs to pay National Insurance, they'll need to review their profits for the relevant financial year. The amount of self-employed NICs owed, if any, will be determined by the threshold reached and the specified NI rate.
The self-employed pay two types of National Insurance depending on profits: Class 2 (until 06/04/2024) and Class 4.
Class 2 National Insurance contributions
In a notable shift for self-employed individuals, a recent policy change in the Autumn Statement 2023 announced the withdrawal of Class 2 National Insurance contributions from the 6th April 2024.
Despite the headlines announcing the end of Class 2 NICs, the reality is a bit more complex.
Here's a closer look at the changes from the 2024/2025:
- Self-employed traders exceeding the Small Profits Threshold will no longer need to pay Class 2 NICs but still receive a credit towards their state pension and benefits.
- Those between the Small Profits Threshold and the Lower Profits Threshold remain unaffected, continuing to receive a credit without paying Class 2 NICs.
- Individuals who earn below the Small Profits Threshold can still opt to voluntarily pay Class 2 NICs at the weekly rate to secure eligibility for future benefits. This practice is not uncommon and ensures that they have a qualifying year for benefits.
Class 2 National Insurance Thresholds & Rates
| 2024/2025 | 2023/2024 | |
| Small Profits Threshold amount per year | £6,725 | £6,725 |
| Lower Profits Threshold amount per year | N/A | £12,570 |
| Rate per week | £3.45 | £3.45 |
Class 4 National Insurance contributions
The self-employed are also required to make Class 4 NICs, which are based on their profits. Self-employed individuals become liable for Class 4 National Insurance when their profits reach the Lower Profits Limit.
Class 4 National Insurance Thresholds & Rates 2024/25
National Insurance reporting and payment obligations for the self-employed
Self-employed individuals are responsible for making their National Insurance payments as part of the Self Assessment process. The deadline for submitting a tax return and making any outstanding payments is the 31st of January.
To streamline this process, we recommended maintaining well-organised records of income and expenses throughout the year.
Having a solid understanding of National Insurance is essential for both employers and self-employed individuals alike. It not only ensures that you're staying on the right side of HMRC, but also provides the right to important state benefits, allows for accurate financial planning, and enables effective management of employment status and tax obligations.
Many employers find it advantageous to outsource their payroll management. This not only saves them valuable time and money, but also gives them access to professionals who specialise in staying up-to-date with the ever-evolving regulations and specific employment allowances that can help reduce their National Insurance liability. Likewise, sole traders frequently seek the guidance of an accountant to carry out their tax return submissions and NI payments.
How can we help? In addition to handling payroll and Self Assessment tasks, our professional tax planning services can assist in refining your overall strategy and improving how you handle National Insurance responsibilities. By analysing your situation carefully and planning ahead, we aim to make sure you not only meet legal obligations but also take advantage of opportunities for financial efficiency - ultimately contributing to your long-term financial success.
This blog was updated on: 06/04/2024
This blog was originally published on: 06/03/2023
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