How Is National Insurance Calculated?

As you are likely aware, National Insurance, or NI, is a tax that UK workers pay on their earnings if they are employees, and on profits if they are self-employed or employers. 

Paying national insurance contributions is required to access certain types of benefits such as state pension, statutory sick pay or maternity leave, or entitlement to additional unemployment benefits. 

This entitlement differs slightly depending on your employment status, age and the type of contributions you make - voluntary or mandatory, etc.

If you don’t pay sufficient NI contributions, then you may not be able to access certain state benefits, either now or in the future.

NI is paid into a government managed fund, and is taken directly from your salary automatically if you are an employee on the PAYE system - (save a few possible exceptions). If you’re self-employed you’ll need to calculate your contributions yourself when you complete your self-assessment tax-return. 

A few other factors also affect the level and type of national insurance contribution you need to pay. Such as, age, level of earnings and residence status. To understand more clearly the different classifications of NI, see the table below:

For a breakdown on how each type of NI class is calculated read the information in the following sections: 

Employees - Class 1

The vast majority of employees, both in-house and agency workers, make Class 1 NI contributions. This is paid through the PAYE system along with income tax.

For this current tax-year 2023\24, you pay 12% on any earnings over £12,570 up to £50,270, and then 2% on earnings over £50,270. 

For the 2022/23 tax year, there were two rates and thresholds that existed between 6 April to 5 July and then 6 July to 5 April 23.

The effect of the changes led to annualised (average) figures of 12.73% on earnings between £11908 to 50270 and 2.73% on earnings above £50270

Your employers are also required to pay contributions on your income, typically of 13.8%. 

Be aware that if you occasionally receive a bonus then you might see fluctuations in your total NI payments.

Self-employed  - Class 2 and Class 4

Most self-employed people with profits over £12,570 will pay both Class 2 and Class 4 national insurance for this current tax-year 2023/24.

Class 2: £3.45 per week - (if your profits are over £6,725 but under £12,570, you will accumulate NI credits, although you're not actually paying Class 2 contributions).

*From April 6th 2024 Class 2 National Insurance will be abolished for Self-employed individuals. They will still receive the benefits of the Class 2 contribution.

Class 4: 9% on profits between £12,570 and £50,270; 2% on profits over £50,270

For tax-year 2022/23 you will have paid;

Class 2: £3.15 a week

Class 4: 10.2% on profits above £9,880 to £50,270 (on the 6th of July the minimum threshold rose to £12,570); 3.25% one profits over £50,270

*As with Class 1, the rates for Class 4 were also lowered to 9.73% for profits between £11,908 and £50,270 and 2.73% on profits above £50,270 on the 6th of November 2022.

Low earners 

If you earn under the personal allowance £12,570 you are not required to pay NI contributions. 

* For self-employed people with profits under the Small Profits Threshold paying Class 2 contributions is voluntary.

Voluntary - Class 3

For those paying voluntary contributions in order to top-up lack of payment in the past the current rate in 2023/24 is £17.45 per week, an increase of £1.60p from £15.85 per week in 2022/23.

Students - NICs

Anyone under 16 will not pay NI. If you are over 16 and a student and work in a job or have a business with earnings/profits above the threshold then you are liable to pay NI in the regular fashion. As per what Class is applicable to you.

Employers - Class 1 A or B

On top of the contributions employees make through their salary, employers must make additional NI contributions for each NI liable employee.

You are required to pay Class 1A and 1B on benefits you give to employees such as company cars, company mobile phones, health insurance and lump-sum payments like redundancy. 

To calculate the NI contributions you need to make as an employer you need to ascertain what category and rate your employees should be assigned. 

To do this you need to,

1. find the ‘letter’ of their category on this HMRC page

And then,

2. find their applicable rate on this HMRC page

As you can see from these pages, it can be quite confusing to work out exactly what you need to pay each individual employee. So we recommend familiarising yourself with this information on the HMRC website. Or speak to our friendly expert advisors who can help explain this further. 

You can pay these contributions Directly to HMRC via their website. For more information visit the HMRC page on Class 1A & B national insurance.

National Insurance Employment Allowance Scheme

You may have heard of something called the ‘National Insurance Employment Allowance Scheme’. This was introduced as a form of tax-relief to help SME businesses with the tax burden of national insurance contributions for their staff. 

Provided that you pay Class 1 liabilities and they were under £100,000 in the last tax year, you can reduce your NI liability by £5000. The relief lasts until the end of the tax-year or the £5000 has been used up, depending on which happens sooner.

Find more information here.

Most people would likely agree that national insurance is a highly important and essential tax contribution that provides security and support in a number of ways for workers. However, given its ethical basis, you shouldn’t pay more or less than you are required to. If you have to pay NI either as an employee or an employer, you can simplify this process by asking a tax advisor for help and guidance.