How is National Insurance (NI) Calculated in the UK

Article By: Jacob Thorne | Published on: 31 January 2025

National Insurance Contributions (NICs) are a cornerstone of the United Kingdom’s social security system, ensuring that workers, employers, and the self-employed alike contribute towards essential benefits such as the State Pension and statutory payments. While the concept might appear straightforward, the actual calculation of NICs can be quite involved, with various classes, thresholds, and exemptions applying to different types of income and employment statuses.

This article provides a comprehensive explanation of how NICs are calculated in the UK for the 2023/24 tax year, outlining the key rates, thresholds, and obligations that affect employees, employers, and the self-employed.

1. Introduction to National Insurance Contributions

National Insurance Contributions (NICs) are payments made by employees, employers, and self-employed individuals in the UK to fund various state benefits. These include the State Pension, some unemployment benefits, and other social security programmes.

  • Employees typically have NICs deducted automatically via their employer’s payroll (Class 1).
  • Employers pay additional NICs on their employees’ earnings (also part of Class 1, sometimes Class 1A or 1B).
  • Self-employed people pay Class 2 and Class 4 NICs based on their profits.
  • Voluntary contributors may pay Class 3 to fill gaps in their National Insurance record.

2. Key Terminology and Thresholds

    Understanding National Insurance begins with a few core definitions:
  1. Lower Earnings Limit (LEL): The point at which earnings start to count towards State Pension entitlement. Earning at or above this level gives you a qualifying year for NICs, but you do not necessarily pay NICs at the LEL.
  2. Primary Threshold (PT): The point above which employees start to pay NICs on their earnings (the employee portion).
  3. Secondary Threshold (ST): The level above which employers must start paying NICs on an employee’s earnings (the employer portion).
  4. Upper Earnings Limit (UEL): The point at which the main (higher) rate of employee NICs drops to a smaller rate on additional earnings.
  5. Lower Profits Limit (LPL) (Self-Employed): Equivalent to the Primary Threshold for employees, this is the profit level above which the main rate of Class 4 NICs applies.
  6. Upper Profits Limit (UPL) (Self-Employed): Equivalent to the Upper Earnings Limit for employees, where the self-employed NIC rate is reduced above this threshold.
  7. Small Profits Threshold (SPT) (Self-Employed): The profit level above which self-employed individuals receive NIC credits (for Class 2) without necessarily paying Class 2 NICs, if their profits are between the SPT and the Lower Profits Limit.

NIC Thresholds for 2023/24

Below are the main thresholds relevant to the current tax year (6 April 2023 – 5 April 2024):

  • Lower Earnings Limit (LEL): £123 per week / £533 per month / £6,396 per year
  • Primary Threshold (PT): £242 per week / £1,048 per month / £12,570 per year
  • Secondary Threshold (ST): £175 per week / £758 per month / £9,100 per year
  • Upper Earnings Limit (UEL): £967 per week / £4,189 per month / £50,270 per year
  • Lower Profits Limit (LPL): £12,570 per year (self-employed)
  • Upper Profits Limit (UPL): £50,270 per year (self-employed)
  • Small Profits Threshold (SPT): £6,725 per year (self-employed)

3. Class 1 NICs (Employees and Employers)

3.1 Employee (Primary) Contributions

For employees on a standard PAYE (Pay As You Earn) scheme, NICs are deducted from wages or salary. The calculation depends on how much you earn in each pay period (weekly, monthly, or other intervals). The 2023/24 employee Class 1 rates are:

  1. 0% on earnings below the Primary Threshold (PT):
    • If you earn below £242 per week (or £1,048 per month), you do not pay NICs.
  2. 12% on earnings between the PT and the Upper Earnings Limit (UEL):
    • This applies to earnings from £242 up to £967 per week (or £1,048 up to £4,189 per month).
  3. 2% on earnings above the UEL:
      4. Anything you earn over £967 per week (or £4,189 per month) is charged at 2%.

ExampleSuppose you earn £1,000 a week.

  • The first £242: 0% NIC
  • The next £725 (£242 to £967): 12% NIC
  • The remaining £33 (above £967): 2% NIC

3.2 Employer (Secondary) Contributions

Employers pay a separate NIC on the gross salary of their employees. For the 2023/24 tax year:

  • 13.8% on earnings above the Secondary Threshold (ST) of £175 per week (or £758 per month, £9,100 per year).

Note that employers do not pay Class 1 NICs on earnings below the Secondary Threshold, but once an employee’s earnings exceed that threshold, every pound above it is liable for 13.8% employer NICs.

3.3 Class 1A and Class 1B NICs

In addition to standard Class 1 NICs on salary/wages:

  • Class 1A NICs (13.8%) apply to most taxable employee benefits, such as company cars or private medical insurance.
  • Class 1B NICs (13.8%) apply when an employer enters into a PAYE Settlement Agreement (PSA) with HMRC, covering tax and NICs for certain employee expenses or benefits.

4. Class 2 NICs (Self-Employed)

Class 2 NICs are flat-rate weekly contributions paid by self-employed individuals. For the 2023/24 tax year:

  • Class 2 rate: £3.45 per week

However, whether you actually pay Class 2 NICs depends on your annual profits:

  1. If your annual profits are below the Small Profits Threshold (SPT) of £6,725:
    • You do not need to pay Class 2 NICs (though you can opt to pay voluntarily to maintain contribution records).
  2. If your annual profits are between £6,725 and the Lower Profits Limit (LPL) of £12,570:
    • You will not be charged Class 2 NICs, but you will still be treated as if you have paid them. This means you build entitlement to benefits (including the State Pension) even without making an actual monetary contribution for Class 2.
  3. If your annual profits are above £12,570:
    • You must pay Class 2 NICs at £3.45 per week (in addition to Class 4 NICs—see below).

Typically, Class 2 NICs are collected via the annual Self Assessment tax return. Payment deadlines coincide with your income tax and Class 4 NICs payment deadlines.

5. Class 4 NICs (Self-Employed)

Class 4 NICs apply to self-employed profits above the Lower Profits Limit (LPL) of £12,570. They are calculated as follows for 2023/24:

  1. 9% on profits between £12,570 and £50,270 (Upper Profits Limit)
  2. 2% on any profits above £50,270

The calculation for Class 4 NICs is done annually via your Self Assessment return and is usually paid by 31 January following the end of the tax year (with payments on account due in January and July, depending on your situation).

6. Class 3 NICs (Voluntary Contributions)

Individuals can pay Class 3 contributions to fill or avoid gaps in their National Insurance record. This can be important if:

  • You have periods of low or no earnings, or
  • You are living abroad but wish to maintain eligibility for the State Pension or other contributory benefits.

For 2023/24:

  • Class 3 rate: £17.45 per week

Voluntary contributions can help you secure a full State Pension, provided you have fewer than 35 qualifying years of NICs and meet other criteria. It is advisable to check your State Pension forecast before making voluntary payments.^[2^]

7. Special Situations and Exemptions

  1. Married Women’s Reduced Rate: Some married women or widows who opted in years past can pay a reduced rate of NIC (if the valid election was made before 1977). However, this is now uncommon.
  2. Employment Allowance: Employers may reduce their Class 1 NICs bill by up to £5,000 per year (2023/24) if they meet certain criteria, such as having secondary Class 1 NICs liabilities below £100,000 in the previous tax year.^[3^]
  3. Director’s NIC Calculation: Company directors often have a different (annualised) method of calculating NICs, meaning their NIC thresholds can work out differently across the tax year.
  4. Freeports and Other Reliefs: Some employers operating within Freeport zones or employing apprentices under 25 can qualify for reduced or zero employer NICs up to certain earnings thresholds.

8. Example Calculations

8.1 Employee on a Monthly Salary of £2,500

  1. Monthly salary: £2,500
  2. Employee NIC:
    • First £1,048 = 0%
    • Next £1,452 (£2,500 – £1,048) = 12% = £174.24
    • There is no income above the Upper Earnings Limit in this scenario, so no 2% NIC applies.
    • Total employee NIC: £174.24
  3. 3. Employer NIC:
    • First £758 = 0%
    • Next £1,742 (£2,500 – £758) = 13.8% = £240.40
    • Total employer NIC: £240.40

8.2 Self-Employed Individual with Profits of £40,000

  • Class 2: Profits above £12,570 ⇒ Class 2 due for the full year.
    • Weekly rate £3.45, for 52 weeks ≈ £179.40
  • Class 4:
    • Profits between £12,570 and £40,000 = £27,430
    • 9% on £27,430 = £2,468.70
  • Total NIC: £179.40 (Class 2) + £2,468.70 (Class 4) = £2,648.10

9. Paying and Reporting NICs

  1. Employees: NICs are automatically deducted by your employer and reported through Real Time Information (RTI) each time you are paid.
  2. Employers: Responsible for paying both employee and employer NICs to HMRC by the 22nd of the following tax month (or the 19th if paying by post).
  3. Self-Employed: Report NICs via Self Assessment. Balancing payments for Class 2 and Class 4 NICs are typically due by 31 January after the end of the tax year, with possible payments on account due 31 January and 31 July.

10. Consequences of Not Paying or Paying Late

Failure to pay NICs correctly or on time may result in:

  • Loss of benefit entitlement: Gaps in contributions can affect your State Pension or other contributory benefits.
  • Penalties and interest charges: HMRC can charge interest and impose penalties for late or incorrect payments.
  • Investigation: Persistent non-compliance can lead to HMRC investigations and further legal action.

11. Where to Get Further Guidance

  • Official HMRC Website:

    • National Insurance: detailed information from GOV.UK This is the most authoritative source for current rates, thresholds, and guidance.

  • State Pension Forecast:

    • Check Your State Pension
    An invaluable tool to see how many qualifying years of NICs you have, and whether making extra contributions might be beneficial.

  • Speak to a Professional:

    • If your situation is complex—e.g., you are a director, you have multiple employments, or you operate a small business—it may be prudent to consult a qualified accountant or tax adviser.

12. Conclusion

National Insurance Contributions form a critical part of the UK’s social security framework, funding essential state benefits, including the State Pension and certain welfare payments. The calculation of NICs depends on your employment status (employee, employer, or self-employed) and the level of your earnings or profits.

For employees, NICs are based on thresholds that determine what portion of earnings is subject to the 12% main rate or the 2% upper rate. Employers face a 13.8% charge above a certain threshold. Meanwhile, self-employed individuals pay a flat Class 2 contribution (if profits exceed £12,570 or voluntarily below that) and Class 4 contributions at 9% (reducing to 2% past the upper limit).

Staying informed on the latest rates and thresholds is key: it ensures you contribute correctly, maintain your entitlement to benefits, and avoid penalties. Always cross-reference with HMRC’s latest guidance, as these figures can change annually each April.

References

  1. HMRC: National Insurance Rates and Categories
  2. HMRC: Voluntary National Insurance
  3. HMRC: Employment Allowance

All data, rates, and thresholds are accurate for the 2023/24 tax year at time of publication.