What is included in Employer National Insurance Contributions
National Insurance is HM Revenue and Customs’ second-largest revenue stream – a crucial UK tax that funds the NHS and state pensions. This section explores National Insurance Contributions (NICs), covering employer obligations and the various types of NICs. National Insurance Contributions, depending on the class, are used for the basic state pension, the additional state pension, the new state pension, the new style jobseeker’s allowance, the contribution-based employment and support allowance, maternity allowance and bereavement support payment.
What are National Insurance Contributions?
National Insurance is a tax deducted from individuals’ labour income. The tax amount is determined by thresholds based on employment status, earnings and other factors. The Office for Budget Responsibility states that NICs are the second-biggest source of revenue. This contribution represents approximately 6% of the national income and contributes to public services such as the NHS and state pensions.
NIC requirements
It is mandatory for employers, employees and self-employed individuals to pay National Insurance from the age of 16. Employers pay National Insurance Contributions on their workers’ earnings, expenses and benefits. The amount is collected by HMRC through the Pay As You Earn system. The self-employed report and pay their NICs through their Self-Assessment.
The following groups are exempt from contributing:
- Those under 16 years old
- Employees or company directors earning less than £242 per week
- Self-employed individuals with profits below £12,570.
Related: A guide to applying IR35 off-payroll working rules
How are National Insurance Contributions calculated?
Employers are responsible for ensuring accurate National Insurance contributions based on earnings thresholds (covered in the next section). These thresholds, along with contribution rates, may change annually, so employers are required to keep updated with HMRC regulations.
Employers also contribute their share towards National Insurance payments. Typically, the standard rate is 13.8% of an employee’s earnings above a set threshold. This cost should be factored in when hiring. However, there are exceptions, such as for apprentices under 25 and employees eligible for Employment Allowance. Consulting HMRC is advisable to ensure your business remains compliant.
Related: What employers should know about temporary workers and agency workers
A quick guide to National Insurance Contribution types
As mentioned, the amount of NICs owed depends on an employee’s earnings and employment status, determined by specific thresholds. Below is an overview of those thresholds:
Class 1 National Insurance
Class 1 National Insurance is applicable to employees under the State Pension age who earn more than £242 per week. This category is divided into primary (employee) contributions and secondary (employer) contributions. As of October of 2024, the rates are structured as follows:
- 8% on earnings between £242 and £967 a week
- 2% on earnings over £967 a week
For company directors, this calculation is based on their annual income.
Class 1A and 1B National Insurance
Class 1A or Class 1B are the contributions on any taxable benefits or expenses provided to employees or directors. The percentage applied is the standard rate.
- Class 1A are payable on work benefits, for example, the value of a business mobile phone, company car or health insurance.
- Class 1B contributions apply if there is a PAYE Settlement Agreement (PSA) which enables the business to make a single annual payment to HMRC.
Class 4 and voluntary Class 2 National Insurance
At the time of writing, class 4 National Insurance applies to self-employed individuals with profits above £12,570. The rates are as follows:
- 6% on profits between £12,570 and £50,270
- 2% on profits over £50,270
The rule for paying Class 2 NICs has changed since 6 April 2024. Self-employed individuals with profits above £12,570 are no longer required to pay Class 2 NICs. They can still benefit from contributory benefits such as the State Pension through a National Insurance credit system.
Self-employed individuals with profits between £6,725 and £12,570 also continue to receive this credit without having to pay Class 2 NICs. However, if their profits are below £6,725, it is possible to make Class 2 NICs voluntarily to ensure continued access to contributory benefits.
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Class 3 National Insurance
Class 3 National Insurance Contributions are voluntary contributions made to fill gaps in NI records to qualify for the State Pension. This may apply to company directors who paid themselves a salary lower than the LEL (Lower Earnings Limit).
For the 2024-25 tax year, the Class 3 voluntary National Insurance amount is £17.45 a week.
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Things to know about employer taxes as a manager
It is important for businesses to understand their obligations regarding NICs. Reporting and payment are the two key steps in managing them, but there’s more you can do to stay compliant and streamline the process. Here are some tips on managing National Insurance as an employer or as a manager.
1. Reporting to HM Revenue and Customs
Reporting earnings to HMRC is the responsibility of the employer. This reporting is required for each employee and prior to each payday.
2. Paying or deducting National Insurance Contributions from income
It is the responsibility of the employer to deduct National Insurance Contributions from the salaries of their employees. Additionally, employers ensure that these deductions are paid to HMRC in a timely manner to remain compliant with tax regulations.
3. Submitting tax returns during the Self-Assessment process for self-employed individuals
Self-employed individuals are required to submit their tax returns and make payments as part of their Self-Assessment process. The deadline for submitting the tax return and for making the payment is 31 January each year.
4. Maintaining organised records for an optimised process
Effective management of National Insurance Contributions requires businesses to maintain well-organised records of employee incomes and expenses. Keeping detailed and systematic records throughout the year simplifies the process, ensuring accuracy and facilitating smoother operations during financial assessments and audits.
Related: What is discounted cash flow?
5. Accounting for the additional cost of Employer National Insurance Contributions
Employer National Insurance Contributions represent an additional cost for businesses. It is essential for employers to account for these contributions in their financial planning to ensure they maintain adequate cash flow. These contributions are paid by the employer and do not reduce the employee’s take-home pay.
Related: What is people analytics?
6. Keeping up-to-date with National Insurance regulations
National Insurance Contribution rules and regulations can change annually. It is the employer’s responsibility to stay informed about these updates and take action accordingly. By keeping track of changes in thresholds and rates, employers can ensure that they apply the correct rates and maintain compliance.
If you are a small business, check How the Federation of Small Businesses can help.
Understanding National Insurance Contributions is essential for employers. Compliance ensures employees receive the correct state benefits for the future. It also aids in accurate financial planning, managing employment status and handling tax obligations.
Given the complexity of these contributions, some employers may find it beneficial to outsource their payroll management. Outsourcing can be a strategic decision that saves time and resources, and it may be particularly advantageous depending on the specific needs and circumstances of your business.
Check our taxes and accountancy pages for more.
