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When you ask UK employers about their biggest headaches, there are two words on everybody's mind: National Insurance.
There's been significant changes to employer National Insurance contributions in recent years. If you're still getting your head around what that means for your payroll budget, this guide covers everything you need to know.
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What is National Insurance?
National Insurance is one of the three main taxes the British Government collects. In 2024/25, it contributed around 20% of the country's total tax revenue, making it roughly level with VAT and the second largest contributor after Income Tax (around 36%).
The tax exists to raise money for state benefits such as the NHS, state pension, maternity allowance and unemployment benefits. In practice though, there's very little difference in how it's spent compared with other taxes.
This leads to a few common misconceptions around how National Insurance works. Many people think of it as a contribution-based system (like a private pension), where the Government creates a personal ‘National Insurance pot' for each taxpayer. That's not the case. It doesn't operate like a pension, and the amount you contribute has very little effect on your individual state pension or NHS entitlements.
In most ways, National Insurance contributions (NICs) operate similarly to Income Tax:
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Revenue from NICs goes directly into central Government and is used for day-to-day public spending.
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Almost all NICs taxpayers are entitled to a tax-free threshold, which for employees sits at £12,570 a year. For employers, it sits at £5,000 a year for the 2025/26 and 2026/27 tax years. This reduction was announced in the Autumn Budget 2024 for the start of the 2025/26 tax year.
But the biggest difference is that NICs are paid by both employers and employees, meaning businesses are responsible for deducting NICs from employees' salaries as well as paying their own contributions on top.
What are employer NICs?
Employer National Insurance Contributions (NICs) are payments made to HMRC for every employee who earns over a certain threshold. There are several different types of National Insurance, depending on who's paying them.
1. Class 1 [Employers]:
These are paid by employers as a proportion of their workers' salaries. The current rates for the 2025/26 and 2026/27 tax year are:
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£0 - £5,000: 0% (tax-free threshold)
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£5,000 and above: 15%
2. Class 1 [Employees]:
These are deducted from employees' salaries via PAYE, just like Income Tax. The standard rates for employee Class 1 NICs:
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£0 - £12,750: 0% (tax-free threshold)
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£12,570 - £50, 270: 8%
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£50,270 and above: 2%
3. Class 1A and 1B:
These are an extra charge paid by employers on certain benefits, expenses and redundancy packages, including things like company cars or gym memberships. Check the UK Government website for more details.
4. Class 2:
Class 2 NICs were a flat rate paid by the self-employed but they were effectively abolished from April 2024. They now only exist as voluntary contributions for self-employed people who want to top up their National Insurance record.
5. Class 3:
Class 3 NICs are voluntary contributions anyone can make to top up their National Insurance record. A person needs at least 10 years of contributions to qualify for the state pension, and 35 years to receive the full entitlement.
6. Class 4:
These are the standard NIC contributions paid by the self-employed, charged as a proportion of total profits. The rates for the 2025/26 and 2026/27 tax years are:
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£0 – £12,570: 0% (tax-free threshold)
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£12,570 – £50,270: 6%
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£50,270 and above: 2%
What is a tax-free threshold?
Before working out how to calculate National Insurance, it helps to understand the tax-free threshold, sometimes called the personal threshold, secondary threshold, or primary threshold depending on which type of NIC you're looking at.
This is the amount an employee can earn before any National Insurance is owed. For employees, the current threshold is £12,570 a year (the same as Income Tax). For employers, the current secondary threshold is £5,000 a year, reduced from the previous £9,100.
Worked examples:
Jane works part-time, 25 hours a week, at PR Newsagents and earns £16,500 a year (£1,375 a month).
Here's what her employee NIC breakdown looks like monthly:
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£0 to £1,047.50: 0%
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£1,047.50 to £1,375: 8%
Calculation:
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£1,375 - £1,047.50 = £327.50
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8% of £327.50 = £26.20
Jane's employer deducts £26.20 a month from her salary, totalling £314.40 a year in employee NICs.
Crucially, the tax-free threshold works in the same way for all employees, regardless of income.
Take Jane's branch manager, Alison, who earns £50,000 a year (£4,166.67 a month). Even though Alison earns significantly more than Jane, she still only pays National Insurance on the portion of her salary above the primary threshold. That's £3,119.17 a month (£37,439 a year), making her employee NICs £249.53 a month or £2,994.40 a year.
The tax-free threshold also applies to Class 1 employer NICs and Class 4 self-employed NICs, though the thresholds differ slightly for each.
National Insurance vs Income Tax: what's the difference?
In practice, there are few meaningful differences between National Insurance and Income Tax. But here are the key ones to be aware of:
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National Insurance is paid by both employers and employees. Income tax is only paid by the individual.
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Unlike Income Tax, National Insurance isn't charged on income from savings, pensions or property.
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To qualify for the state pension, you need to have at least 10 years of National Insurance contributions, or 35 years for the full entitlement. Income Tax has no equivalent link beetween contributions and benefits.
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Income Tax rates are generally higher and more progressive. Earnings over £50,270 are charged at 40% for Income Tax, compared to just 2% for employee NICs above that threshold.
Changes to employer National Insurance: what happened in April 2025
In the Autumn 2024 Budget, the Government announced significant changes to employer National Insurance contributions, which came into effect from April 2025
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The employer NIC rate rose from 13.8% to 15%
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The secondary threshold (the point at which employer NICs kick in) dropped from £9,100 to £5,000 per year
This means employers now pay NICs on every pound of wages above £5,000 per year, rather than £9,100. These changes mean businesses face higher costs for each employee particularly affecting part-time and lower- paid employees.
How to calculate employer National Insurance contributions
To see what this look like in practice, let's return to PR Newsagents and consider Jane's full-time colleague, Mark, who works 40 hours a week and earns £2,500 a month (£30,000 a year).
Under the pre-April 2025 rate:
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£0 to £758: 0% (tax free threshold)
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£758 to £,2500: 13.8%
Calculation:
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£2,500 - £758 = £1,742
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13.8% of £1,742 = £240.40
PR Newsagent's employer NICs for Mark: £240.40 a month (£2,884.20 a year)
Under the current rates (2025/26 and 2026/27):
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£0 to £417: 0% (tax-free threshold)
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£417 to £2,500: 15%
Calculation:
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£2,500 - £417 = £2,083
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15% of £2,083 = £312.45
PR Newsagent's employer NICs for Mark: £312.45 a month (£3,749.40 a year)
That's an increase of £864.60 a year for a single employee on a £30,000 salary.
How to reduce the impact and claim the Employment Allowance
As a result of the National Insurance Contributions changes, businesses up and down the country are looking for ways to reduce their National Insurance Contributions - especially small-to-medium sized businesses (SMEs).
The most significant relief available to small employers is the Employment Allowance. It acts as a flat deduction from your annual employer NIC bill, regardless of how many employees you have.
From April 2025, the Employment Allowance rose from £5,000 to £10,500 a year. The previous eligibility cap of £100,000 in employer NICs was also removed, meaning more businesses now qualify.
One important thing to note: the Employment Allowance isn't applied automatically. You need to claim it each tax year through your payroll software when submitting your Full Payment Submission (FPS) to HMRC.
Here's how the savings break down for businesses of different sizes. The examples below use a full-time salary of £26,500 a year (£2,208.33 a month), which reflects a 40-hour week at the 2026/27 National Living Wage of £12.71 per hour.
Employer NIC calculation per employee at £26,500:
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Monthly salary: £2,208.33
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Secondary threshold: £316.67 per month (£5,000 annually)
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Taxable amount: £2,208.33 - £416.67 = £1,791.66
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Employer NIC a 15%: £1,791 x 15% = £268.75 per month / £3,225 per year
|
Number of employees |
Annual NIC cost |
After Employment Allowance |
Saving |
|
5 employees |
£16,125 |
£5,625 |
65.1% |
|
20 employees |
£64,500 |
£54,000 |
16.3% |
|
40 employees |
£129,000 |
£129,000 |
0% (Employment Allowance not applicable at this scale) |
As the table shows, the Employment Allowance is designed to help the smallest businesses most. If you're eligible, claiming it is one of the most straightforward ways to manage your employer NIC costs. To find out how to do so, check out this guide from the UK Government website.
Other ways to reduce the impact of National Insurance changes
Beyond the Employment Allowance, there are a few other strategies worth exploring.
Salary sacrifice schemes
Salary sacrifice is an arrangement where an employee agrees to give up part of their salary in exchange for a non-cash benefit, such as a pension contribution, cycle-to-work scheme, or childcare vouchers. Because the benefit replaces part of the salary, both the employee and the employer pay NICs on a lower amount, reducing NIC exposure for both parties.
It's worth taking advice before setting up a salary sacrifice scheme to make sure it's structured correctly.
Non-cash benefits
Benefits like additional paid leave, flexible working, and wellbeing support can help attract and retain employees. These won't reduce your employer NICs directly, but they can be a cost-effective way to reward your team if you're unable to give raises or bonuses.
Review your workforce structure
Regularly assessing workforce needs can help businesses manage payroll costs effectively in light of National Insurance changes.
If your headcount is changing, it's also worth checking whether you still qualify for the Employment Allowance and that your payroll system reflects the most up-to-date rates.
Staying compliant with employer National Insurance
Getting your employer NICs right isn't just about the numbers. There are reporting and record-keeping obligations to be aware of too.
Reporting to HMRC
Employers must ensure timely payment of National Insurance contributions to avoid penalties from HMRC. You must report NICs to HMRC in real time using Real Time Information (RTI), via a Full Payment Submission (FPS) on or before employee payday. Late or incorrect submissions can lead to penalties.
Payment deadlines
Employer NICs are part of the regular PAYE responsibilities, and late payments can result in penalties. Contributions must be paid via the Pay as your Earn system (PAYE). The payment deadline is the 22nd of the following month (19th if paying by post), which means it's worth planning your cash flow accordingly.
Record keeping
Employers must maintain accurate records of NICs for at least three years. This includes keeping records of employee classifications, since incorrectly classifying a worker as self-employed can leave the employer liable for unpaid NICs.
Quarterly payment option for easier cash flow planning
Small employers with an average monthly PAYE and NI bill of £1,500 or less may be eligible to pay quarterly rather than monthly, which can help with cash flow planning.
NIC exemptions
There are some exemptions worth knowing about. Employers don't pay Class 1 NICs for apprentices aged under 25, or for qualifying veterans in their first year of civilian employment. Check the UK Government website for the full list of exemptions and category letters.
Payroll software
Using payroll software can automate calculations and ensure compliance with the latest National Insurance rates and thresholds. Claiming the Employment Allowance can also be done directly through payroll software when submitting your FPS.
Director liability
If a business fails to meet its NIC obligations, directors can face personal liability in addition to HMRC fines. It's not an area to leave to chance.
Working out your National Insurance contributions (NICs)
It's worth taking the time to make sure your employer National Insurance calculations are accurate, especially as rates and thresholds have shifted significantly in recent years.
Breathe's free National Insurance calculator does the hard work for you. Put in your numbers and get a clear picture of what you owe.
Use the National Insurance calculator
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