National Insurance: the basics :: St Matthew eAccounting

National Insurance is distinct from income tax paid as an employed or self-employed individual.

NICs are collected by HM Revenue & Customs and go towards benefits, such as a state pension and unemployment benefit. The class of NICs an individual pays can affect their entitlement to benefits.

This guide gives an overview of each class and how they apply in some typical circumstances.

National Insurance contribution types

There are different types of National Insurance contributions (NICs). Some are paid at a flat rate - with others, the amount payable is linked to earnings.

Class 1 NICs are calculated using three levels of earnings set by the government - the earnings threshold, the lower earnings limit and the upper earnings limit.

The earnings threshold and the upper earnings limit are explained below. The lower earnings limit is the level at which employees are entitled to National Insurance benefits, even if they are not making any contributions.

The table below shows the various different categories of NICs and who pays them.

NIC types explained

NIC type	Who pays it?	Basic explanation of NIC type
Class 1 primary contributions	Employees earning over the primary earnings threshold	Employees pay Class 1 NICs at one rate on their gross earnings over the earnings threshold up to the upper earning limit (UEL) and at a reduced rate for earnings over the UEL. They are "deducted at source" from employee's salaries.
Class 1 secondary contributions	Employers, on the salaries of employees who earn over the secondary earnings threshold	Employers pay Class 1 NICs on their employees' gross earnings over the earnings threshold at a flat rate. There is no UEL for employer's NICs. These are paid to HM Revenue & Customs, usually on a monthly basis.
Class 1A contributions	Employers	Payable by employers on their employees' benefits in kind which are available for private use, such as a company car or private medical insurance. These are calculated and paid annually.
Class 1B contributions	Employers	Payable only by employers who have entered into a PAYE Settlement Agreement with HM Revenue & Customs to account for tax on certain expense payments and benefits.
Class 2 contributions	Self-employed	Payable by the majority of self-employed individuals at a flat rate, either weekly, monthly or quarterly.
Class 3 contributions	Voluntary	Payable at a flat rate by those who have not paid enough NICs in the past to qualify for certain benefits, such as a state pension.
Class 4 contributions	Self-employed	Payable by self-employed individuals who have made a certain amount of profit in a year. Calculated annually using the self-assessment tax return form.

National Insurance contributions for employers and employees

Different types of National Insurance contributions (NICs) are calculated and collected in different ways, with differing responsibilities for how they are calculated and paid.

Class 1 NICs

Employers are responsible for calculating, deducting and paying Class 1 primary NICs, or employees' contributions, to HM Revenue & Customs on behalf of all employees, including directors, earning above the earnings threshold. These must be deducted from their salary.

Employers must also calculate and pay Class 1 secondary NICs, or employers' contributions, for all employees earning above the earnings threshold. And employers must keep adequate records showing how their NICs were calculated and what payments have been made for each employee. See our guide on Class 1 National Insurance contributions.

Class 1A NICs

Employers must calculate and pay Class 1A NICs due on taxable benefits given to employees, such as company cars or health insurance. These must be declared on form P11D annually and a copy given to the relevant employee by 6 July after the end of the tax year - download form P11D from the HM Revenue & Customs website (PDF).

Class 1B NICs

These are only paid by employers who have a PAYE Settlement Agreement with HM Revenue & Customs.

Class 3 NICs

These are paid voluntarily by individuals who want to protect their right to certain benefits, for which they have not yet made sufficient contributions. Individuals are responsible for finding out if they need to pay Class 3 NICs and for setting up a method of payment. See our guide on Class 3 National Insurance contributions.

National Insurance contributions for the self-employed

Self-employed people pay two types of National Insurance contributions (NICs) - Class 2 and Class 4.

Class 2 NICs

Most self-employed people pay Class 2 NICs, unless they earn too little or have a certificate of exception. These are paid weekly at a flat rate by the self-employed, unless they earn too little or have a certificate of exception. They are collected by HM Revenue & Customs, either by quarterly bills or by direct debit. See our guide on Class 2 National Insurance contributions.

Class 4 NICs

Class 4 NICs are paid in addition to Class 2 NICs by self-employed people who make a profit over a certain limit in the tax year. Self-employed people declare their profits annually on a self-assessment tax return. The self-assessment supplement contains a Class 4 calculator. See our guide on Class 4 National Insurance contributions.

I'm both an employer and an employee

As a director of your own limited company you are liable for Class 1 National Insurance contributions (NICs) on your earnings like any other employee.

Therefore, in your capacity as your own employer, you must calculate the Class 1 primary contributions due, deduct them from your salary and forward payment to HM Revenue & Customs.

The company, as your employers, must also calculate the relevant secondary contributions and forward these to HM Revenue & Customs.

If you have director status in your company, you should be aware that your Class 1 contributions are calculated differently to those of employees, as directors' NICs are calculated on a cumulative basis. See our guide on Class 1 National Insurance contributions.