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National insurance payments are a key part of the British tax system, affecting everyone from employees and employers to the self-employed. National Insurance Contributions (NICs) help fund state benefits and are crucial in accessing the State Pension, but not everyone has to make them.
Contributions are based on earnings or profits and only those earning above a certain threshold have to make them. Knowing what these thresholds are and how they impact employees and self-employed people is an important part of controlling your finances.
Before we discuss thresholds, the first step in calculating your NICs is to determine which Class applies to you. These are:
- Class 1: employees and employers, subject to certain earnings thresholds.
- Class 2: self-employed people whose profits exceed the Lower Profits Threshold pay a flat weekly rate. Class 2 can also be paid voluntarily if profits are less than the lower profit threshold, which is recommended as it counts towards state pension entitlement.
- Class 3: a voluntary contribution made by anyone who doesn’t earn or profit enough to meet National Insurance thresholds, but wants to maintain their record.
- Class 4: self-employed people earning above the Lower Profits Limit must also make a percentage-based contribution in addition to Class 2.
Within these classes, there are unique thresholds for earnings/profits that govern whether you need to make NICs and how much they will be. Here’s a brief overview of each:
Class 1 thresholds
- Lower earnings limit
- Primary threshold
- Secondary threshold
- Upper earnings limit
Class 2 thresholds
- Small profits threshold
- Lower profits limit
Class 4 thresholds
- Lower profits limit
- Upper profits limit
In this article, we’ll discuss what each of these thresholds means and how they might apply to you. Once you know which threshold fits your earnings/profits, you can then determine the NICs rate you’ll have to pay.
We’ll start by looking at the thresholds for the most common type of contribution, known as Class 1.
Class 1 national insurance thresholds: what you need to know
NICs are calculated based on a percentage of employee earnings. The table above shows how earnings fall into different thresholds, which act as categories that change how you’ll make your NICs.
- Lower Earnings Limit
The lower earnings limit, or LEL, is the minimum earnings threshold and is set at £6,396 for 2023/24. If your earnings meet this threshold, you won’t have to pay NICS but will be viewed as having done so for the purposes of your NI record. Whether your earnings decrease or increase, you don’t have to make NICs until earnings exceed the next threshold, known as the Primary Earnings Threshold.
- Primary Threshold
The next threshold is when you start making NI contributions as an employee. It is known as the primary threshold and is currently set at £12,570. This is the same as the income tax threshold, known as the personal allowance – which essentially means until you earn more than £12,570, you won’t pay a penny in tax or NI.
Once you are over the primary threshold, however, you’ll make primary contributions based on a percentage of your earnings. The percentage depends on your National Insurance category letter, with amounts varying from 0 to 2%, 5.85% and 12%. Most employees in the UK are category letter A, so will make primary contributions at 12%.
- Secondary Threshold
The secondary earnings threshold is when employers start paying towards an employee’s NI. This is done through PAYE and is based on the employee’s National Insurance category letter. Depending on the employee’s category letter, employers will either pay 0% or 13.8%.
- Upper Earnings Limit
Employees whose salaries exceed the upper earnings limit (UEL) will pay a reduced percentage of NI on any earnings above the limit. This is set at 2% in 2023/24 and is intended to help limit the overall amount of contribution a high earner has to make.
There are some other niche thresholds, such as the Freeport upper secondary threshold, but these only apply on rare occasions. Click here to see all thresholds.
Employee and employer national insurance contributions for 2023/24
For employees, making NICs is fairly straightforward, as your employer will do the calculations on your behalf through PAYE. The thresholds help your employer determine which rate will apply to your earnings, which you can see in the graph below.
National insurance contributions as a self-employed professional
Self-employed people pay National Insurance differently, with two separate classes called Class 2 and Class 4, each with their own thresholds. The contributions you make will be determined when you complete your Self Assessment and are based on profits, not your total earnings.
Class 2 National Insurance Contribution Thresholds
Class 2 NICs are charged as a flat rate of £3.45 per week, but only if your profits bring you above the Lower Profits Limit. Sometimes you may report profits which are low enough to fall into the Small Profits Threshold, which means they won’t have to make Class 2 contributions at all.
Lower Profits Limit
The Lower Profits Threshold sets the minimum amount of profit you must make before you are eligible for Class 2 or Class 4 NICs. As of 2023/24, it is set to £12,570 - meaning you’ll need to report at least that much profit before any NIC rates are applied.
Small Profits Threshold
The Small Profits Threshold relates only to Class 2 NICs. If your profits are less than £6,725, you don’t need to pay Class 2 NIC. If, however, you still want to be eligible for state benefits, you can make voluntary contributions.
If your profits fall between the Small Profits Threshold and Lower Profits limit, you won’t have to pay NICs but will be viewed as having made Class 2 contributions for the purposes of accessing benefits.
Class 4 National Insurance Contribution Thresholds
Class 4 NICs are charged as a percentage rate on profits. As of 2023/24, this is 9% for profits meeting the Lower Profits Limit and 2% for profits exceeding the Upper Profits Limit.
Lower Profits Limit
This is the lowest amount of profit required before you begin making Class 4 contributions. It is identical to the Primary Threshold, but that may not always be the case in future tax years.
As of 2023/24, the limit is set to £12,570 – meaning any self-employed person reporting profits of more than £12,570 will be subject to both Class 2 and Class 4 contributions.
Upper Profits Limit
The Upper Profits Limit is unique to Class 4 contributions and introduces a profits limit which, once exceeded, allows for a reduced rate. As of 2023/24, this is £50,270 – meaning any profits over that will be subject to a lower rate for the purposes of determining contributions.
Determining your Class 2 and Class 4 contributions
Self-employed people can work out which NICs to make by calculating total profit and then determining which thresholds and limits apply to you.
- Profits below £12,570: no NICs to pay, though if your profits are over £6,725 you’ll be classed as paying Class 2 NICs.
- Profits between £12,570 - 50,270: you’ll pay £3.45 per week in Class 2 NICs and 9% Class 4.
- Profits exceeding £50,270: you’ll pay £3.45 per week in Class 2 NICs, 9% on profit up to £50,270 and then 2% on everything above that.
If that sounds confusing, you’re in luck, we’ve got a guide to both Class 2 and Class 4 contributions to help make National Insurance for self-employed people as simple as possible.
Protecting your state pension: the benefits of voluntary national insurance contributions
Whether you’re an employee or self-employed, certain earnings/profit levels mean you may not have to make any contributions. However, failing to do so might not be a good idea, depending on your plans for the future.
Making full National Insurance Contributions across a tax year means you’ll have a ‘qualifying year’ in the eyes of the government. Benefits like the state pension require a certain amount of qualifying years, so some low earners choose to make voluntary contributions instead.
Voluntary contributions can be used to fill gaps on your National Insurance Record, potentially granting you access to the full state pension.
Determine your National Insurance Contributions with Crunch
If you’ve read through this article, you’ll now understand how National Insurance payments are impacted by the earnings and profits thresholds. Remember the following key points, which will help you determine the contributions you must make.
- Employers make Class 1 NICs on behalf of employees if earnings exceed the secondary threshold of £9,100
- Employees only make Class 1 contributions if their earnings are above the Primary Threshold of £12,570.
- Self-employed people calculate contributions based on profits, not earnings. They may have to make two different types of contributions – Class 2 and Class 4.
- Class 2 contributions are made as a flat weekly rate on profits over the Lower Profits Threshold of £12,570
- Class 4 contributions are calculated in addition to Class 2 as a percentage of earnings over the Lower Profits Limit.
Now that you understand National Insurance Thresholds and how they impact the rate at which contributions are determined click here to try our free calculator to see how much income tax and National Insurance you have to pay.
If you’d like to get more help with working out your NICs and your wider tax obligations, get in touch with one of our experts today to see how our accountancy software can make tax easier than ever.
