The way national insurance is calculated depends on whether you are an employee, an employer or self-employed.
In this guide, you’ll learn about the different national insurance classes, rates and thresholds in place in the UK and find examples of how each one is calculated.
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
What is National Insurance?
National Insurance** is a type of UK tax where workers (whether employed or self-employed) pay into a ‘pot’ which then entitles them to claim certain state benefits such as:
- Job seekers allowance
- Statutory sick pay
- Maternity pay
- Self-employed maternity allowance
- State pension
- NHS
You begin to pay national insurance once you are 16 years old and stop paying it once you reach the state pension age.
The government track how much national insurance a person has contributed by their national insurance number.
** National insurance is also called NI, NICs or Social Security
National Insurance Classes
There are 4 different types of NI classes. Each one has its own NI rates, thresholds and method of payment. Which class or classes you belong to depends on your personal status:
- Class 1: paid by employees automatically deducted through their payslips;
- Class 1a: paid by employers on their employee’s gross salary and benefits in kind;
- Class 2: paid by self-employed individuals on their taxable business profits;
- Class 3: voluntary contributions to fill gaps in national insurance records to claim the state pension;
- Class 4: paid by self-employed individuals on their taxable business profits (this is in addition to class 2).
You may pay more than one class of national insurance depending on how you earn your income.
How Do You Pay National Insurance?
You pay national insurance through your payslip if you are employed by someone. Your employer then takes responsibility for paying HMRC they deduct over to HMRC under the PAYE system, along with their contribution for employers NI.
If you are self-employed, you must pay any national insurance you owe by 31 January each year and 31 July if you need to make a payment on account. The amount you’ll pay will be calculated once you fill in your tax return.
National insurance rates cover one tax year. A tax year runs from 6 April to 5 April each year, with any changes to NIC rates usually taking effect at the start of every tax year.
Class 1 National Insurance Rates
If you are employed by someone you’ll pay Class 1 NICs and you’ll see that deduction on your payslip being taken from your income along with other deductions like income tax, pension contributions and student loans.
Class 1 National Insurance Rates 2023-24
- 0% on gross earnings up to the lower earnings limit of £12,570
- 12% on gross earnings between the lower earnings limit of £12,570 per year to the upper earnings limit of £50,270 per year
- 2% on gross earnings over the upper earnings limit of £50,270 per year
How to Calculate Class 1 National Insurance
You earn a salary of £3,500 per month for the tax year 2023-24. You’ll pay class 1 national insurance of £294.24 which is calculated as:
- 0% on your first £1,048 (£12,570 ÷ 12)
- 12% on the remaining £2,452
What is the Lower Earnings Limit?
The Lower Earnings Limit (LEL) is the amount an individual can earn without paying national insurance, but without suffering gaps on their national insurance record, so keeping their entitlement to claim state benefits.
How You Pay Class 1 National Insurance
Class 1 NICs are calculated by your employer and deducted from your payslip before you are paid. Your employer then pays over these deductions, along with any other made on your behalf such as income tax, to HMRC on your behalf.
Class 1a National Insurance (Employers NI)
Employers pay Class 1a National Insurance on staff on their payroll above the secondary threshold. Below this level, the employer NI rate is 0% for certain employees under 21, apprentices under 25 and certain military veterans, which is known as the upper secondary threshold.
What is the Secondary Threshold?
The secondary threshold for national insurance is only relevant for employers National Insurance payments. Whereas the primary threshold relates to employees National Insurance.
Class 1a National Insurance Rates 2023-24
- 13.8% above gross earnings of £9,100 per year
What is the Upper Secondary Threshold?
There is an additional level called the upper secondary threshold where the employer NI starts paying 13.8% when income exceeds £50,270 for certain employees under 21, apprentices under 25 and certain military veterans.
Class 1a on Benefit in Kind
Class 1a National Insurance is payable by employers on benefits in kind given to employees such as private medical or a company car.
Employees pay additional income tax on any benefits in kind they receive from their employer. Any additional national insurance payable needs to be reported to HMRC using P11d form and P11d(b) form.
How You Pay Class 1a National Insurance
Employers will calculate how much Class 1 NICs they owe as part of the PAYE system when they pay their employees. Employers pay class 1a contributions to HMRC usually once a month, along with deductions made from employees’ payslips.
Class 2 National Insurance
Class 2 national insurance is paid by self-employed individuals at a set weekly rate on their taxable business profits. Class 2 national insurance stops sole traders from having gaps in their national insurance records protecting their ability to claim state benefits like the state pension.
Class 2 National Insurance Rates 2023-24
£3.45 per week on taxable profits over £6,725
How to Calculate Class 2 National Insurance
Your taxable business profits are £40,000 for the tax year 2023-24 and you were self-employed for the full tax year. You’ll pay class 2 national insurance of £179.40 which is calculated as £3.45 x 52 weeks.
Class 2 national insurance can be paid voluntarily, even when a sole traders business profits are below the threshold of £6,725. In certain circumstances, this can prevent gaps in their national insurance records protecting their entitlement to claiming state benefits.
How You Pay Class 2 National Insurance
When you fill in your tax return, HMRC will automatically calculate your tax bill. You will be given the option to pay Class 2 voluntarily if your business profits are below the threshold. You pay Class 2 NICs by 31 January each year, along with filing your tax return.
Class 2 NICs do not count towards your payment on account calculation.
Class 1 and Class 2 national insurance contributions count towards your eligibility for the state pension and other benefits like job seekers allowance and maternity pay. Class 3 national insurance only counts towards the state pension.
If you are unable to work and pay Class 1 or Class 2 NICs, you may be eligible to claim national insurance credits to avoid gaps on your record.
Class 3 National Insurance
Class 3 is a voluntary NIC payment that individuals can make to fill any gaps in their national insurance records to protect their entitlement to the state pension.
Under the Governments pension rules, you can only claim the new state pension in full if you have made 35 qualifying years* of national insurance contributions, either through class 1 or class 2 NICs. You must have paid NICs for at least 10 qualifying years to make it claim at all.
*a qualifying year means a tax year
Your state pension will be restricted if you have less than 35 qualifying years by the number of gaps in your NI records. So if you have one gap, that means you have 34 qualifying years and your state pension will be restricted by 34 ÷ 35 years.
Class 3 national insurance is a voluntary payment you can make to top up your national insurance contributions and fill any national insurance gaps on your record. You can check your national insurance record and see if you have any gaps by logging into your .GOV personal tax account.
You can usually only top up NI gaps for the previous 6 years. The current class 3 NIC is £17.45 per week. If you are voluntarily paying class 3 national insurance for the previous two tax years, you’ll pay the rates that were set for those years. You’ll pay the current year’s set rate for any tax years prior to that.
Class 3 National Insurance Rates
| Tax Year | Class 2 Weekly Rate |
|---|---|
| 2023 – 2024 | £17.45 |
| 2022 – 2023 | £15.85 |
| 2021 – 2022 | £15.40 |
| 2020 – 2021 | £15.30 |
Class 4 National Insurance
Class 4 NICs are payable by sole traders in addition to Class 2. Sole traders pay Class 4 national insurance when their business profits go above a certain threshold – known as the lower profits limit.
You’ll pay Class 1 and Class 2 NICs until you reach the state pension age, even if you stop working. But if you are self-employed you’ll continue to pay class 4 NI until the end of the tax year in which you reach the state pension age.
Class 4 National Insurance Rates 2023-24
9% on taxable profits between £12,570 to £50,270 and 2% thereafter
That means for the tax year 2023-24 you’ll pay class 4 national insurance once your profits exceed £12,570.
Here’s an example:
You live in England and your taxable business profits were £40,000 for the tax year 2023-24. You’ll pay class 4 national insurance of £2,468.70 which is calculated as:
- 0% on the first £12,570
- 9% on the remaining £27,430
Read this guide to learn more about self-employed tax and see some examples of how it is calculated.
How You Pay Class 4 National Insurance
When you fill in your tax return, HMRC will automatically calculate your tax bill and tell you how much Class 4 national insurance you owe. You pay Class 4 NICs by 31 January each year, along with filing your tax return.
Class 2 v Class 4 National Insurance
Class 2 national insurance protects your ability to claim certain state benefits when you’re self-employed as long as you’ve made sufficient contributions. Class 4 national insurance is really just a type of tax on profits, in addition to income tax.