National Insurance Contributions – or NICs – have been in the headlines in the past few months. And they’re likely to remain a hot topic as the rate paid by employers increases next year.
That’s because Rachel Reeves announced in her first Budget that they would increase by 1.2 percentage points from April 2025.
Most people understand what NICs are – but how do they affect business owners and employers?
What are National Insurance Contributions?
NICs are paid by employers, employees and the self-employed. Although called a tax, they are not strictly that. They are a contribution towards state spending on supporting those working people who require financial help in difficult times.
NICs are paid by employees and self-employed people from the age of 16 until the person reaches retirement age. You are legally obliged to pay NICs if you are in work and earning at least £242 a week. Employers are also expected to pay NICs, which we’ll look at in more detail below.
National Insurance was introduced by the government in 1911 to provide a system of insurance to protect the poorest people in society. NICs were meant to provide for those facing a loss of income due to sickness or unemployment.
Since then, the NICs system has changed and the payments help fund other payments. These include jobseeker’s allowance, maternity allowance and other support allowances. Ultimately, NICs are still designed to cover the cost of helping those who are worse off when they are unable to work.
What are the different classes?
National Insurance Contributions are split into four classes.
- Class 1 NICs are paid by employees. If you earn between £12,570 to £50,270, you will pay 8% of your earnings. If you earn more than £50,270 you pay an additional 2% on earnings, making it 10% in total. These are paid automatically and are taken via Pay As You Earn along with your income tax. That means you don’t have to personally make the payments.
- Class 2 NICs are an option for the self-employed to pay additional contributions. They used to be a compulsory, weekly payment, but from April 2024 they are now voluntary. These payments allow the self-employed the opportunity to top up their entitlement to the state pension. They are paid directly to HMRC via direct debit or bank transfer.
- Class 3 contributions are voluntary. These are used to plug any gaps employees might have in their National Insurance records so they qualify for certain benefits, including state pension. Like Class 2, they are paid directly to HMRC.
- Class 4 contributions are paid by the self-employed. They pay 6% on profits between £12,750 and £50,270. For anyone exceeding that, they pay an additional 2%.
Class 1A and 1B contributions are paid by employers only. Class 1A applies to benefits in kind, such as mobile phones. Class 1B contributions are paid on PAYE settlement agreements.
What is employer National Insurance?
Employer National Insurance is a levy on businesses and other employers. The government requires employers to pay NICs on top of employee wages. Again, the payments are used as a contribution to help fund services such as state pensions and social security benefits.
At the moment, businesses pay a 13.8% on employees’ earnings above £9,100 a year. From April 2025, employer NICs will be 15% on a lower threshold of £5,000. That means businesses will pay NICs for employees who earn more than £5,000 annually.
Employers are eligible to reduce their National Insurance liability by up to £5,000. This is increasing to £10,500 from April 2025. It works by giving an allowance to reduce NICs. So, if the total NIC bill for the tax year 2025/26 is £12,000, you only pay £1,500.
If you have more than one payroll, you can only claim against one payroll.
With these changes being around the corner, ensure you don’t make any mistakes as HMRC will be keeping track. Payroll software or outsourcing your payroll can help ensure you don’t fall foul of the law.
Needing help with NICs
With the changes in the Budget, dealing with NICs can feel daunting for employers who are already dealing with an economic slowdown. For more help, you can contact our team for a no obligation meeting.
