National Insurance contributions explained

National Insurance contributions (NICs) are the UK’s second-biggest tax, expected to raise just under £170 billion in 2024–25 – around a sixth of all tax revenue.

National Insurance contributions explained

They are paid by employees and the self-employed on their earnings, and by employers on the earnings of those they employ.

Up to a certain threshold, earnings are free of NICs. The main rates are payable on earnings above that level, but the employee and self-employed rates – though not the employer rate – are lower on earnings above a higher threshold (see chart and table below).

Rates in table apply above the stated thresholds. The chart and table ignore the employment allowance. The chart shows annual thresholds, which for employee and employer NICs assume earnings are stable throughout the year.

Unlike income tax, NICs are not charged on income from other sources such as savings, pensions or property. Payment of NICs qualifies individuals to receive certain social security benefits (most notably the state pension). In practice, however, the link between contributions paid and benefits received is vanishingly weak and NICs essentially act as a second income tax.

What incomes are subject to NICs?

NICs are levied on the earnings of individuals aged 16 or over. Individuals over the state pension age are not liable for employee or self-employed NICs, but employer NICs are still due on their earnings.

The earnings that are taxable are earnings from employment and earnings (profits) from self-employment (as a sole trader or member of a partnership – note that this does not include profits from a company, though a company might employ its owner and pay him/her a salary). In measuring earnings for NICs purposes:

• Work-related expenses can be deducted; the rules on what can be deducted are much stricter for employees than for the self-employed.
• The treatment of benefits in kind (payment to employees in the form of goods or services rather than money, such as company cars or health insurance) varies. Some are subject to NICs in full; others (generally those that cannot be sold or traded) are subject to employer but not employee NICs.

NICs are not levied on other income, such as income from savings and investments, rental income from property, private pensions, state pensions and other social security benefits.

Unlike for income tax, private pension contributions made by an employee or self-employed individual cannot be deducted from earnings for NICs purposes. This makes sense, since (unlike income tax) NICs are not levied on the future pension income they generate. However, pension contributions made by an employer on their employee’s behalf are not included in earnings for NICs purposes. This means that remuneration in the form of employer pension contributions escapes NICs altogether: there are no NICs when the money is paid into the pension, and no NICs when money is received from the pension either.

Employee and employer NICs rates, thresholds and reliefs

The table below shows the current rates and thresholds of employee and employer NICs. Employee and employer NICs liabilities are assessed separately for each period for which an employee is paid; the table shows the thresholds in weekly terms, as is conventional, but they are adjusted pro rata for employees who are paid (say) monthly.

Rates apply above the stated thresholds. The table ignores employment allowance.

NICs thresholds are usually expressed in weekly terms. But in fact the NICs due on a particular employee’s earnings are assessed according to the period for which they are paid. Someone paid monthly, for example, will be liable for employee NICs if their earnings for the month are above £797, the monthly equivalent of the £184 threshold shown in the table. Liability in each pay period is assessed separately, unlike income tax, which depends on the individual’s income for the year as a whole.

In some ways, this makes NICs easier to administer: NICs can be calculated straightforwardly for each salary payment, without the need to make adjustments if it turns out that some months’ earnings are not typical of the year as a whole. But it unfairly creates differences in overall tax payments between people with similar annual earnings, depending on whether the earnings are received evenly through the year or vary from month to month. Relative to people with the same annual earnings spread evenly, it penalises people with low, volatile earnings (for example, someone must pay NICs if they earn more than the threshold in a particular period, even if their average earnings across the year are below the threshold) but favours people with high, volatile earnings (since earnings concentrated in a particular period might fall in large part above the upper earnings limit (UEL) and be subject to employee NICs of only 2%, even if their earnings are below the UEL on average).

Where an individual has more than one job, or earnings from both employment and self-employment, NICs are charged separately on each. However, the full 8% employee NICs rate only applies up to a maximum of the (annualised) upper earnings limit across all jobs (for the year as a whole). If an individual has two jobs each paying just under the UEL, therefore, part of their earnings will be subject to the 2% rate that applies above the UEL even though neither job pays above the UEL. Broadly speaking, each job has its own NICs-free threshold but the UEL applies to an individual’s earnings across all jobs. Low earners thus pay less NICs if their earnings are split across jobs, but high earners do not pay more NICs if their earnings are split across jobs.

Employer NICs have, in effect, a tax-free threshold per employer as well as a tax-free threshold per employee. The employment allowance reduces each employer’s aggregate NICs liability by up to £5,000 a year, provided that their liability in the previous year was less than £100,000 (and that a company director is not the sole employee earning above the secondary threshold). This takes many small employers out of paying employer NICs altogether, although much employer NICs revenue comes from big employers which are not eligible for the employment allowance.

Two groups of employees have their earnings taxed less heavily:

• No employer NICs are payable on the earnings, up to the upper earnings limit (UEL), of employees aged under 21 or apprentices aged under 25.
• A special married women’s reduced rate of employee NICs, 3.85%, is available on earnings between the primary threshold and the UEL (in exchange for lower benefit entitlements), but since May 1977 this option has been available only to married women paying it almost continuously since that date, which is now a very small number.

Employee NICs are taken out of earnings, whereas employer NICs are paid on top of earnings. The rates of the two are therefore not directly comparable, and when looking at the overall level of NICs on employment, the headline rates should not simply be added up and compared with the level of gross earnings (see the technical note below). A more informative calculation is to look at total NICs paid as a fraction of the total amount the employer pays out (i.e. their total labour cost – earnings plus employer NICs). On this basis, the combined main NICs rate – the marginal rate The amount of additional tax due as a percentage of each additional £1 of a tax base (such as income). Read more applying between the primary threshold and the UEL – is not 21.8% (8% + 13.8%) but 19.2% ((8% + 13.8%) ÷ 113.8%).

When considering the total NICs charged on a job, it is tempting simply to add up employee and employer NICs and look at how the total relates to earnings. For example, between the primary threshold and the UEL, the employee NICs rate is 8% and the employer NICs rate is 13.8%, so it might seem natural to say the total NICs rate is 21.8%. However, that is not very informative and can be misleading.

The problems with simply adding up employee and employer NICs rates arise because employee NICs are taken out of earnings while employer NICs are paid on top of earnings. Continuing the above example, for £100 of earnings, the £8 employee NICs reduce the amount the employee receives to £92 while the £13.80 employer NICs increase the amount the employer pays to £113.80. In other words, the tax base for NICs – gross earnings – includes employee NICs but does not include employer NICs.

Because of this, looking at how total NICs liability relates to earnings without disaggregating employer and employee NICs is not very informative: it doesn’t tell us what proportion of what the employer pays is ultimately received by the employee. Saying that, for example, total NICs are £50 when earnings are £100 could mean very different things depending on the balance of employer and employee NICs. If it were all employee NICs, the employee would receive half of what the employer paid out; if it were all employer NICs, the employee would receive two-thirds of what the employer paid out.

Worse, looking at total NICs relative to earnings is potentially misleading. Simply adding up the employee and employer NICs rates can be a false guide to the overall burden of the tax: a system with a 25% overall NICs rate on that measure might actually be higher-tax than a system with a 30% overall NICs rate, if the 25% comes entirely from employee NICs (£25 NICs for each £100 paid by the employer) while the 30% comes entirely from employer NICs (£30 NICs for each £130 paid by the employer – only £23 for each £100 paid out).

A more sensible measure of the combined NICs rate is total (employee and employer) NICs paid as a proportion of the total (NICs-inclusive) cost to the employer. Between the primary threshold and the UEL, for example, the 8% employee NICs rate and 13.8% employer NICs rate mean that NICs are £21.80 (£8 employee NICs + £13.80 employer NICs) for each £113.80 the employer pays out (£100 earnings + £13.80 employer NICs), so the combined marginal NICs rate on the employer’s payment is 19.2% (£21.80 ÷ £113.80). This rate (and the equivalents for different levels of labour cost) are shown in the chart below.

The chart below shows the combined rates of employee and employer NICs. The marginal NICs rate is the proportion of each additional £1 of labour cost paid by the employer that is taken in NICs. The average NICs rate is the proportion of the total labour cost paid by the employer that is taken in NICs. The chart highlights that, while NICs are progressive A tax is progressive if tax liability increases more than in proportion to the tax base, or to income. Read more across most of the earnings distribution – the average tax rate The amount of tax paid as a percentage of the tax base (typically income). Read more is higher for those earning more – it is not progressive A tax is progressive if tax liability increases more than in proportion to the tax base, or to income. Read more at the top. The average rate peaks at 15.5% at the UEL, the point at which the marginal rate The amount of additional tax due as a percentage of each additional £1 of a tax base (such as income). Read more of employee NICs falls from 8% to 2% and the overall marginal NICs rate falls from 19.2% to 13.9%.