What is National Insurance, and what are Class 1 NICs?

The National Insurance scheme was originally established as part of the post-war welfare state, helping to fund state benefits and public services.

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 2026/27 tax year.

National Insurance – fundamentals

National Insurance Contributions (NICs) are payable to HMRC based on earnings and, for the self-employed, profits.

National Insurance is not simply a ring-fenced fund for individual benefits. However, your National Insurance record helps determine your entitlement to certain contributory benefits and the State Pension.

For example, you will not normally be entitled to a full new State Pension unless you build up enough qualifying years 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 the relevant employer threshold.

It is worth noting at the outset that NICs are payable only on earnings, not on 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. Your company must still pay employer NICs on salary above the secondary threshold (see below).

Here is a breakdown of NI classes.

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 a director – then there can be two NIC charges: employee NIC deducted from your salary and employer NIC paid by the company.

Employees NI

• 8% on income between £12,570 and £50,270.
• 2% on income above £50,270.

Employee NIC is deducted from the employee’s pay through PAYE payroll and paid to HMRC by the employer.

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 on those earnings.

However, an employee can start building a National Insurance qualifying year without actually paying employee NIC. For 2026/27, the Lower Earnings Limit is £6,708 per year (£129 per week).

Employment Allowance

Your company may also be eligible to claim the Employment Allowance, which can reduce its Class 1 employers’ NIC bill by up to £10,500 annually.

However, you can’t claim if you’re the company’s sole director and employee.

The scheme reduces employers’ NICs that would otherwise be due on salaries above the secondary NIC threshold.

The Employment Allowance was increased from £5,000 to £10,500 from April 2025.

Class 1A or 1B

Employers may also have to pay NICs on taxable benefits provided to employees and directors. For example, company cars and private medical insurance can give rise to Class 1A NICs.

For 2026/27, the Class 1A and Class 1B rate is 15%. As an employer, you 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), different National Insurance rules apply to your profits.

• Class 2 NICs – if your yearly profits are at or above the £7,105 Small Profits Threshold, your Class 2 contributions are treated as having been paid for the purposes of your National Insurance record without you actually paying them. If your profits are below £7,105, you can choose to make voluntary Class 2 contributions of £3.65 per week to help protect your entitlement to contributory benefits, including the State Pension.
• Class 4 NICs – 6% on profits between £12,570 and £50,270 and 2% on profits above £50,270.

Other points to note

If you are self-employed, your Class 4 NICs are generally calculated and paid via Self Assessment. Voluntary Class 2 contributions can also be dealt with through Self Assessment where applicable. Class 1 NICs must be managed via your payroll system.

Class 1 NICs are reported and paid through PAYE, with the timing depending on your payroll and PAYE payment arrangements.

Taking part of your income as dividends instead of a salary can reduce National Insurance.