A Comprehensive Guide to National Insurance Contributions for Employees, Employers, and the Self-Employed
Introduction
National Insurance Contributions (NICs) are a type of tax you pay to qualify for certain benefits, like the State Pension. Both employees, employers, and the self-employed must pay NICs, but how much you pay depends on your earnings and your employment type. In this guide, we will look at the allowances and thresholds for NICs for employees, employers, and self-employed people in the UK for the 2024/25 tax year. Let’s keep it simple!
What Are National Insurance Contributions?
NICs are payments made by employees, employers, and the self-employed to help fund the UK’s social welfare system. These contributions go towards State Pension, Unemployment Benefits, and other social services. There are different classes of NICs depending on your work type:
Class 1: Paid by employees and employers.
Class 2: Paid by self-employed people.
Class 3: Voluntary contributions.
Class 4: Also paid by self-employed people based on profits.
National Insurance Contributions for Employees
If you are an employee, you pay Class 1 NICs. Your employer also pays NICs on your behalf. Let’s look at the details:
| Tax Band | Threshold/Allowance | Amount (£) | Rate (%) | Notes |
|---|---|---|---|---|
| Lower Earnings Limit | £6,396 per year | N/A | N/A | Earnings above this limit qualify for NIC credits. |
| Primary Threshold | £12,570 per year | 0 | 0 | No NICs payable up to this amount. |
| Upper Earnings Limit | £50,270 per year | 12 | 12% | You pay 12% on earnings up to this limit. |
| 2 | 2% | 2% NICs on income above £50,270. |
Lower Earnings Limit: If you earn above this limit, you qualify for NIC credits. These credits count towards your State Pension.
Primary Threshold: You don’t need to pay NICs if your earnings are below £12,570 per year.
Upper Earnings Limit: You pay 12% on earnings up to £50,270 and 2% on any earnings above that amount.
National Insurance Contributions for Employers
Employers also pay Class 1 NICs for their employees. This helps fund social security benefits. Here are the thresholds and allowances for employers:
| Tax Band | Threshold/Allowance | Amount (£) | Rate (%) | Notes |
| Secondary Threshold | £9,100 per year | 13.8 | 13.8% | Employers pay NICs on earnings above this threshold. |
| Employment Allowance | £5,000 per year | N/A | N/A | This reduces the NIC bill for eligible employers. |
Secondary Threshold: Employers must pay 13.8% NICs for employee earnings above £9,100 per year.
Employment Allowance: Employers can reduce their NIC bill by up to £5,000 if they qualify. Not all employers can get this, so it’s important to check eligibility.
National Insurance Contributions for the Self-Employed
If you are self-employed, you pay Class 2 and Class 4 NICs. These NICs are based on your profits, and they help you qualify for benefits like the State Pension.
| Class | Threshold/Allowance | Amount (£) | Rate (%) | Notes |
| Class 2 | Small Profits Threshold | £6,725 per year | £3.15 per week | Pay if your profits are above this amount. |
| Class 4 | Lower Profits Limit | £12,570 per year | 0% | No NICs are payable up to this limit. |
| Upper Profits Limit | £50,270 per year | 9% | 9% NICs on profits between £12,570 and £50,270. | |
| 2% | 2% NICs on profits over £50,270. |
Class 2 NICs: These are paid at a flat rate of £3.15 per week if your profits are above the Small Profits Threshold of £6,725.
Class 4 NICs: If your profits are above £12,570, you will pay 9% on profits between £12,570 and £50,270, and 2% on profits over £50,270.
Recent Changes and Updates
Recently, the government made changes to NIC thresholds and rates. Understanding these changes is important for both employees and employers:
Freeze on Personal Allowance: In 2021, the government announced a freeze on the Personal Allowance until 2026. This means that even if prices rise, the thresholds stay the same.
Impact on NICs: The freeze means more people may end up paying higher NICs if their earnings increase.
Changes to Employment Allowance: The Employment Allowance increased to £5,000, allowing small businesses to save more on their NICs bill.
Examples of National Insurance Payments
Let’s look at some simple examples to understand how these NICs work.
Example 1: Employee Earning £30,000 per Year
If you earn £30,000 a year, you pay 12% NICs on the amount above the Primary Threshold of £12,570.
This means £30,000 - £12,570 = £17,430 is taxable for NICs at 12%.
Your NIC bill would be £2,091.60.
Example 2: Employer Paying Employees
If an employer pays an employee £25,000 per year, they pay 13.8% NICs on the amount above the Secondary Threshold of £9,100.
The NIC would be £25,000 - £9,100 = £15,900 at 13.8%, which equals £2,194.20.
Example 3: Self-Employed Person Earning £40,000 in Profits
For Class 2, if profits are above £6,725, the individual pays £3.15 per week.
For Class 4, they pay 9% on the profits between £12,570 and £50,270, which means £40,000 - £12,570 = £27,430 at 9%.
This results in £2,468.70 for Class 4 NICs.
How to Plan and Stay Compliant
Proper NIC planning can save you a lot of money and help avoid penalties. Here are a few tips:
Check Your Eligibility for Allowances: Make sure you are making use of any allowances, like the Employment Allowance.
Keep Good Records: Always keep your earnings and expense records up to date to make it easier to calculate your NICs.
Use a Professional Accountant: If you’re unsure about your NIC obligations, it may be a good idea to consult with a professional. MA & CO Accountants can help guide you through the process.
Additional Resources
To understand more about NICs and ensure you are paying the correct amount, check out the following resources:
These resources will help you make sense of NICs and learn how to save money while staying compliant.
Conclusion
Understanding National Insurance Contributions is essential if you want to keep more of your income. Whether you are an employee, an employer, or self-employed, knowing the thresholds and allowances can help you plan better and avoid unnecessary costs. Remember to always check for the latest updates, as NIC thresholds and rates can change each year.
If you need help with your NICs, reach out to MA & CO Accountants. We can help you stay compliant and make sure you don’t pay more than you need to.
Note: This guide provides general information and should not be considered financial or tax advice. Always seek personalized guidance from a tax professional.
FAQs
1. What are National Insurance Contributions (NICs)?
NICs are payments made by employees, employers, and the self-employed to fund social services like the State Pension and unemployment benefits.
2. What is the difference between Class 1, Class 2, and Class 4 NICs?
Class 1 NICs are paid by employees and employers. Class 2 and Class 4 NICs are paid by the self-employed, with Class 2 being a flat rate and Class 4 based on profits.
3. How much does an employee have to earn before paying NICs?
Employees start paying NICs once they earn above the Primary Threshold, which is £12,570 per year for the 2024/25 tax year.
4. How can employers reduce their National Insurance bill?
Employers may be eligible for the Employment Allowance, which can reduce their NIC bill by up to £5,000 per year.
5. What happens if I am self-employed and my profits are below the Small Profits Threshold?
If your profits are below £6,725 per year, you do not need to pay Class 2 NICs. However, you can choose to pay voluntarily to qualify for benefits like the State Pension.
6. What is the Upper Earnings Limit for employees?
The Upper Earnings Limit for employees is £50,270 per year. You pay 12% NICs on earnings up to this amount and 2% on anything above.
7. How much do self-employed individuals pay in NICs on profits over £50,270?
Self-employed individuals pay 2% NICs on profits over £50,270 for Class 4 contributions.
8. Can I make voluntary NICs?
Yes, Class 3 NICs are voluntary contributions that you can make to fill gaps in your National Insurance record, which helps ensure you qualify for benefits like the State Pension.
For more information on National Insurance Contributions, visit MA & CO Accountants' services page.
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