If you’ve ever looked at your payslip and wondered why your take-home pay is less than you expected, National Insurance Contributions (NICs) might be the culprit.
Despite being a cornerstone of the tax and welfare system for over a century, NICs remain a source of confusion for many.
This guide aims to demystify National Insurance, explaining its purpose, who pays it, and how it affects your finances.
Whether you’re an employee, employer, or self-employed individual, understanding NICs is crucial for managing your money effectively and planning for your future.
What Are National Insurance Contributions?
National Insurance is a system of contributions paid by workers and employers. It helps fund various state benefits, including the NHS, state pensions, and unemployment support.
Despite its name suggesting something insurance-related, NICs are taxes in practice.
They’re the government’s second-largest source of tax revenue, expected to raise nearly £170 billion in 2024–25 – about a sixth of all tax revenue.
Unlike income tax, NICs are levied specifically on earnings from employment or self-employment. This means other forms of income, such as dividends, rental income, or investment returns, aren’t subject to NICs.
Who Pays National Insurance?
National Insurance is paid by:
- Employees earning above a certain threshold
- Self-employed individuals
- Employers, on behalf of their employees
Let’s break this down further:
Employees
If you’re employed, you’ll start paying NICs once your earnings reach £242 per week (as of 2024-25). It’s worth noting that NICs are calculated on a pay-period basis, not annually, like income tax.
Once you reach State Pension age, you stop paying NICs, even if you continue working. This is a key difference from income tax, which is payable regardless of age.
Self-Employed
If you’re self-employed, you pay two types of NICs:
- Class 2: A flat weekly rate (£3.45 in 2024-25) if your profits are £12,570 or more per year
- Class 4: A percentage of your profits (6% on profits between £12,570 and £50,270, and 2% on profits above £50,270)
From April 2024, Class 2 contributions become voluntary for the self-employed, allowing them to protect their benefit entitlements if they choose to pay.
Employers
Employers also contribute to the National Insurance system.
If you’re an employer (or planning to be), you’re responsible for managing National Insurance contributions for your workforce. This is a key part of running payroll; getting it wrong can be costly.
Your main responsibilities include:
- Calculating and deducting the correct employee NICs through payroll
- Paying employer NICs at 13.8% on earnings above £175 per week
- Managing and reporting NICs on benefits and expenses
- Keeping accurate records for HMRC
Additionally, employers eligible for the Employment Allowance can currently reduce their annual NICs bill by up to £5,000. This allowance will increase to £10,500 from April 2025.
Since NICs are just one part of running payroll, we recommend reading our complete guide to payroll management, which covers everything from PAYE to reporting requirements.
Remember – managing payroll properly helps you avoid penalties while keeping your employees happy!
How Much Will I Pay?
The amount of NICs you pay depends on your employment status and how much you earn. Here’s a breakdown for the 2024-25 tax year:
For Employees:
- 0% on the first £242 of weekly earnings
- 8% on earnings between £242.01 and £967 per week
- 2% on any earnings above £967 per week
For Employers:
- 13.8% on employee earnings above £175 per week
Additionally, certain upper secondary thresholds apply for specific groups (such as employees under 21, apprentices under 25, armed forces veterans, and employees in Freeport and Investment Zones).
Employers pay a 0% rate up to specific thresholds, with 13.8% payable on earnings above those limits.
For Self-Employed:
- Class 2: £3.45 per week if profits are £12,570 or more per year
- Class 4: 6% on profits between £12,570 and £50,270, then 2% on profits above £50,270
It’s worth noting that the self-employed generally pay less in NICs than employees with equivalent earnings, mainly due to the lack of an equivalent to employer NICs for the self-employed.
National Insurance and Benefits
While the link between NICs and specific benefits has weakened over time, your NIC record still affects your eligibility for certain state benefits. The most significant of these is the State Pension.
To qualify for a full State Pension, you typically need 35 qualifying years of NICs. A qualifying year is one in which you’ve paid or been credited with enough NICs.
This is why some people choose to make voluntary contributions to fill gaps in their record.
Other benefits that depend on your NIC record include:
- New Style Jobseeker’s Allowance
- New Style Employment and Support Allowance
- Maternity Allowance
- Bereavement Support Payment
It’s important to understand that while these benefits require a NIC record, the amount you receive is not directly proportional to the amount you’ve paid in NICs.
Changes Coming in 2025
The 2024 Budget announced major changes to employer National Insurance starting from April 2025:
For Employers:
- The main employer NIC rate rises from 13.8% to 15% on earnings above £96 per week (down from £175)
- The Employment Allowance doubles from £5,000 to £10,500
To put this in real terms:
- For an employee earning £20,000, employer NICs will rise from £1,504 to £2,250 per year
- For an employee earning £40,000, employer NICs will rise from £4,264 to £5,250 per year
However, the increased Employment Allowance means many small businesses won’t pay any employer NICs at all. You’ll need to think about:
- Whether your total NICs bill falls under the new £10,500 allowance
- The timing of any new hires
- How you structure employee pay packages
For businesses near the new Employment Allowance threshold, careful planning of wages and hiring could help you stay within the allowance and avoid NICs entirely.
Wrapping Up
NICs are an essential component of the tax system. They impact take-home pay, fund essential public services, and contribute to eligibility for state benefits.
Managing your NIC obligations can be complex, especially if you’re self-employed or running a business.
Getting it wrong can affect both your current tax position and your future benefits eligibility.
At Double Point, our chartered accountants help individuals and businesses understand their National Insurance responsibilities. We can:
- Review your NIC status and ensure you’re paying the correct amount
- Help self-employed individuals understand and manage their Class 2 and Class 4 contributions
- Advise on voluntary contributions and their potential benefits
- Support employers with their NIC calculations and obligations
Book a consultation with Double Point today to discuss your National Insurance needs and ensure you’re making the most of available opportunities while staying compliant.
