The National Insurance scheme was originally set up to pay for the newly established NHS and other state benefits after the Second World War as part of establishing the welfare state.
Workers would pay a percentage of their income so that people who could not work due to age, infirmity, or ill health could still have money to live on.
This guide has been updated for the 2025/26 tax year.
National Insurance – fundamentals
National Insurance Contributions (NICs) are payable to HMRC as a deduction from earnings.
Whilst those contributions don’t directly fund things like the benefits system or state pension now, how much you contribute will ultimately determine your level of entitlement to receive certain benefits if you ever need them.
For example, you will not be entitled to a full state pension if you do not pay enough during your working life.
Anyone who earns a salary above a certain amount (see below) has to pay NICs, and employers also have to pay NICs for their employees who earn over that amount too.
It is worth noting from the beginning that NICs are only payable on earnings, not dividends. If you are a company director and draw dividends rather than a salary, you will not need to pay NICs on your income from those dividends.
Expert advice should be sought on which would be most tax-advantageous for your particular circumstances: drawing dividends (which attract tax at a rate linked to your income) or a salary. You must still pay NICs for employees who earn over the secondary threshold (see below).
Here is a breakdown of the different classes of NI.
Class 1 NICs
These are paid partly by the employee and partly by the employer. If you are both – that is, you run a limited company and take a salary from that company as director – then you will effectively pay twice; once as the employer and once as an employee.
Employees NI
- 8% on income between £12,570 and £50,270.
- 2% on income above £50,270.
This is taken directly from their gross income by you as the employer and paid to HMRC.
Employers NI
- 15% of each employee’s salary over £5,000 per year.
Therefore, if you or your employees earn less than £5,000 per year, the company pays no employers’ NI.
However, the employee must earn at least £6,500 (the Lower Earnings Limit) for the year to qualify for the state pension
Employment Allowance
Your company may also be eligible to claim the Employment Allowance, which will refund up to £10,500 of Class 1 employers’ NICs annually.
However, you can’t claim if you’re the director and the only employee of the company.
The scheme allows you to reclaim employers’ NICs only if your salaries exceed the secondary NIC threshold.
The Employment Allowance was increased from £5,000 to £10,500 from April 2025.
Class 1A or 1B
Under these classes, employers also pay NICs on any other benefits paid to their employees, including themselves, if they draw a salary (for example, company car, private health care, travel expenses).
As an employer, you will pay these NICs directly to HMRC.
To calculate the NICs you need to pay as a company director, you can use the ‘standard annual earnings period’ method or the ‘alternative’ method, depending on how regularly you draw your salary.
Class 2 and 4 NICs
If you are classed as self-employed (perhaps through a partnership), you must pay NICs on your income.
- Class 2 NICs are now voluntary. If your yearly profits are below the £6,845 small profits threshold, you can make voluntary payments of £3.50 per week. This ensures that the tax year counts towards your State Pension eligibility.
- Class 4 NICs are 6% on all profits between £12,570 and £50,250 and at 2% above £50,250.
Other points to note
If you pay Class 2 or 4 NICs, this can be accounted for via self-assessment. Class 1 NICs must be managed via your payroll system.
All NICs are payable each time you run your payroll (for example, every month or week).
The careful use of dividend payments can be used to reduce your company’s liability to NICs as part of a tax-planning package.
