What Is National Insurance Tax: Classes, Rates, and Who Pays It

No matter whether you’re an employee, employer, or self-employed, working or running a business in the UK goes hand in hand with National Insurance tax. At the end of the day, your National Insurance contributions determine if you qualify for certain benefits, like Maternity Allowance, State Pension, and other benefits. 

In the following sections, we explore in detail what is National Insurance tax, who pays it, what its purpose is, and more. 

What Is National Insurance?

National Insurance is a mandatory contribution system in the UK that partially funds the National Health Service (NHS) and the state benefits. It’s a tax on earnings that employers, employees, and those in self-employment are obliged to pay. 

In essence, National Insurance is more of a social security contribution instead of a tax. However, as it’s a mandatory payment collected by the Government, it falls under the tax category.  

The Purpose of National Insurance

In the UK, National Insurance is created to fund vital parts of the country’s social security system. 

Unlike general taxation, where funds are pooled into the government’s total budget, National Insurance has a very specific purpose – to provide financial support to individuals during key periods in life. These include maternity, retirement, periods with medical problems, and others.

National Insurance contributions (NICs) don’t just disappear into general government income. They help fund a range of state benefits that people may use when needed.

Supporting the National Insurance Fund

A large portion of the contributions goes toward the National Insurance Fund – a fund that pays contributory benefits and is separate from the Consolidated Fund. 

Surpluses from NIF are invested in the Commissioners for the Reduction of the National Debt in the Debt Management Account or government-backed instruments. Money from the National Insurance Fund is not available for general public spending and is only allocated to contributory state benefits. 

These benefits include:

• The State Pension; 
• Maternity Allowance; 
• Employment and Support Allowance;
• Bereavement benefits. 

What’s important to understand about this fund is that it operates on a “pay-as-you-go” system. This means that contributions collected in the current year are used to cover the benefits being paid out in the same year. In practice, the largest portion of these payments goes toward State Pension costs. 

The National Insurance Fund is controlled by the Social Security Administration Act of 1992. This law dictates what these funds can be used for. At the same time, if the fund builds up a substantial surplus, it can lend the remaining NICs revenue to other government areas. Broadly speaking, this often means lowering national debt. 

On the other hand, in cases where the resources are low or not enough to cover the benefits, the Treasury is responsible for allocating money from general government funds. 

Linking Contributions to Entitlements

National Insurance, unlike general taxation, is directly linked to individual benefits. Contributions are recorded on each person’s National Insurance record, and this record becomes incredibly important later in life, determining eligibility for contributory benefits. 

One of the most important benefit entitlements is the State Pension. To qualify for the full State Pension, individuals must have made certain pension contributions throughout their working life. In most cases, this means having 35 qualifying years of National Insurance contributions over a minimum of 10 years. 

Remember that contributions are cumulative. Individuals who miss a year, for example, will have an impacted total amount when they reach State Pension age. 

It’s worth noting that private pensions are entirely separate from the State Pension. Private or workplace pensions are accumulated independently via personal savings or employer contributions, while the State Pension is fully dependent on your National Insurance record. 

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Who Pays National Insurance?

There are three groups of people who are obliged to pay National Insurance contributions – employees, employers, and self-employed persons. 

Employees

Employees are the first group of people who are required to pay contributions. Employee NICs are a must if you’re 16 or older and are earning more than £242 per week from one job.

In this case, you’re obliged to pay Class 1 National Insurance, where your employee contributions are 8% for those earning from £242 to £967 a week (£1,048 to £4,189 a month) and 2% for those earning more than £967 a week (£4,189 a month). 

It’s important to note that there are certain limits. From 2025 to 2026, if earnings are below the lower earnings limit (LEL), employees do not pay NICs and do not get ‘treated as paid’ credits. Credits that protect entitlement apply when earnings are between the LEL and the Primary Threshold.

In other words, if the employee is generating earnings between the LEL and the primary threshold (£242 per week), no NICs must be paid. Note that there’s a cap at the upper earning limit (currently £967 per week). 

For the purposes of tax planning, keep in mind that employers also have an obligation to pay Class 1 NICs at 15% on the employee earnings above the secondary threshold.

At the end of the tax year, employees receive a P60 form that outlines what National Insurance contributions and income tax they’ve paid over the year. 

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Employers

As mentioned, there are also obligatory employer NICs that need to be paid.

Employers pay Class 1 NICs on behalf of their employees as a percentage of salaries. As of April 2025, employers pay NICs at 15% on the majority of employees’ wages that exceed £5,000. Before, this percentage was 13.8% on salaries above £9,100. 

The employer's secondary threshold was recently reduced from £175 per week to £96 per week for 2025-26, meaning that employers must now pay employer Class 1 NI on lower earnings.

In addition, companies are also obliged to pay 15% NI on expenses and benefits they’ve provided to their employees. These could include things like health insurance or company cars. 

Another recent change is that the Employment Allowance (how much employers can legally claim back from their NI expenditure) increased from £5,000 to £10,500. Naturally, the Employment Allowance can bring down the NICs for small employers. 

Self-Employed Individuals

Self-employed individuals in the UK also pay National Insurance contributions, but differently from employees and employers. 

Rather than having contributions deducted through payroll, self-employed workers are responsible for calculating and paying National Insurance as part of their Self Assessment tax return. You can do so via digital payment methods like tap to pay through your online banking app or mobile wallet. 

The amount you pay depends entirely on your annual profits, not your total income. Profits are calculated by subtracting allowable business expenses from your self-employed earnings.

Self-employed people pay Class 2 and Class 4 NICs based on their profits. 

Here’s a breakdown of self-employed NICs:

• Class 2 - applies when annual profits are £6,845 or more. 
• Class 4 - applies when profits are more than £12,570 a year.

For the 2025-26 tax year, if your profits are £6,845 or more per year, then Class 2 contributions are treated as paid automatically to protect your National Insurance record. You do not pay Class 2 NICs, but your contribution record is still credited, helping you qualify for things like the State Pension.

If you're making less than £6,845 per year, you’re not required to pay Class 2 NICs, but you can choose to pay voluntarily. Voluntary Class 2 contributions are charged at a weekly flat rate of £3.50, and paying them can be beneficial if you want to maintain your NI record. This is highly recommended if you’re starting a new business, working part-time, or having a low profit year.

You’ll also need to pay Class 4 NICs if your annual profits are above £12,570. For the 2025-26 tax year, the rates are 6% on profits between £12,570 and £50,270, and 2% on profits over £50,270.

Some self-employed individuals do not pay Class 2 or Class 4 NICs through Self Assessment but may choose to pay voluntary contributions to protect their National Insurance record.

National Insurance Classes and Rates

Although we already mentioned the different NIC classes and rates, let’s take a moment to summarise everything covered above.

Keep in mind that during 2024, there were National Insurance cuts in the UK. 

The thresholds previously rose every year based on inflation levels. However, instead of increasing the thresholds in line with inflation, the previous Conservative administration decided to lock the NI threshold and tax-free personal allowance at £12,570 until 2028, along with keeping the higher-rate tax threshold fixed at £50,270.

In November 2025 the government confirmed the freeze on personal tax and equivalent National Insurance thresholds would continue until 5 April 2031.

The following classes and rates apply in England, Wales, Scotland, and Northern Ireland. 

Class 1 NICs: Paid by Employees and Employers

Class 1 NICs contributions start at a specific income threshold and increase progressively, where rates differ between employee and employer contributions.

Employees pay Class 1 NICs in the following weekly earnings scenarios:

• £0 – £242: 0%
• £242 – £967: 8%
• Over £967: 2%

Employers pay Class 1 NICs on employee earnings at a rate of 15% on earnings above the secondary threshold, which is £5,000 a year. Note that this contribution is not taken from the employee’s pay but is a separate expense for the employer. 

There are also Class 1A and Class 1B specifics related to cases where the employee receives benefits or the employer uses a PAYE Settlement Agreement to cover tax. 

Class 1 NICs are 0% for employees earning under £125 per week. In this case, the earnings don’t generate “treated as paid” credits, and no qualifying contributions are recorded for contributory benefits.

Class 2 and Class 4 NICs: Paid by Self-Employed Individuals

Class 2 and Class 4 NICs can be mandatory on self-employed profits, depending on the threshold.

Class 2 NICs are paid as a flat rate if profits exceed the lower profits limit. For example, for the 2025-26 tax year, Class 2 is ‘treated as paid’ when profits are at or above the Small Profits Threshold (£6,845). If profits are below that threshold, you do not get automatic credit but may choose to pay voluntary Class 2.

On the other hand, Class 4 NICs are calculated as a percentage of profits above the threshold. 

Class 4 contributions are:

• 6% for those earning between £12,570 and £50,270 per year; 
• 2% for those earning more than £50,270 per year. 

Voluntary Contributions: Class 3 NICs

Apart from Class 1, 2, and 4, there is also a Class 3 NIC, which represents a voluntary NIC. 

You can pay voluntary contributions to protect your future benefits entitlement as long as you:

• Don’t fall under the categories obliged to pay Class 1 or Class 2 NICs;
• Are not entitled to pay Class 2 contributions voluntarily;
• Are not entitled to receive National Insurance credits.

Keep in mind that your Class 3 contributions will only go towards your State Pension. This type of contribution is also much more expensive compared to other NICs.

The Broader Impact of National Insurance

Oftentimes, National Insurance is simply viewed as another expense on income, but its purpose and impact go far beyond individual benefits. 

It plays a major role in funding the UK’s social security system, supporting key public services, and contributing to the strength and stability of the economy.

For example, NI revenue helps fund social security programs and supports public healthcare services. Workers can contribute at the peak of their financially active years, where their contributions guarantee financial safety when they most need it. 

Most other countries with developed economies have similar social insurance or welfare contributions. For instance, German employees and employers pay into social insurance funds that cover pensions, unemployment, and healthcare. 

At the same time, National Insurance also affects the overall tax burden and contributes to general taxation revenues. It raises billions of pounds every year, reducing the reliance on borrowing and helping the government avoid increases in income tax or corporate tax.

Conclusion

National Insurance is a vital part of the UK’s social security system. In addition to understanding your obligations in terms of NI, it’s also key that you maintain a complete National Insurance record to avoid uncertainties and conflicts in the future. 

No matter whether you’re an employee, employer, or self-employed, make sure you are fully aware of the contributions you need to make and seek advice if needed. 

Frequently Asked Questions