Calculating and Paying National Insurance Contributions

National Insurance contributions (NICs) are deducted from employees' wages alongside income tax, with both the employee and employer paying their share. Understanding the thresholds, rates, and category letters that apply to your workforce is essential for running payroll correctly and avoiding underpayment or overpayment to HMRC.

What Are National Insurance Contributions?

National Insurance is a tax on earnings that funds state benefits including the State Pension, NHS, and various welfare payments. When you employ staff, you must deduct Class 1 National Insurance from their wages (employee contributions) and also pay your own employer contributions on top.

Your payroll software calculates these deductions automatically based on each employee's earnings and their National Insurance category letter.

When National Insurance Becomes Payable

Not all earnings attract National Insurance. Several thresholds determine when contributions start:

Lower Earnings Limit: £125 per week (£542 per month, £6,500 per year). Employees earning below this amount don't pay National Insurance and don't build up entitlement to certain benefits.

Primary Threshold: £242 per week (£1,048 per month, £12,570 per year). This is when employees start paying National Insurance on their earnings. No employee contributions are due on earnings below this level.

Secondary Threshold: £96 per week (£417 per month, £5,000 per year). This is when you as an employer start paying National Insurance contributions. Employer contributions begin at this much lower threshold than employee contributions.

Upper Earnings Limit: £967 per week (£4,189 per month, £50,270 per year). Above this level, the employee contribution rate drops from 8% to 2%. Employer contributions continue at 15% on all earnings above the secondary threshold with no upper limit.

Employee National Insurance Rates

For the 2025/26 tax year, most employees fall under category letter A, which means:

• 0% on earnings up to £242 per week
• 8% on earnings between £242 and £967 per week
• 2% on earnings above £967 per week

You deduct these amounts from your employee's gross pay each pay period. The contributions are paid to HMRC alongside income tax as part of your PAYE obligations.

Employer National Insurance Rates

As an employer, you pay 15% on all earnings above the secondary threshold of £96 per week. Unlike employee contributions, there's no upper limit where the rate reduces—you continue paying 15% on all earnings above this threshold.

For a standard category A employee earning £600 per week, you would pay:

• Employee deduction: (£600 - £242) × 8% = £28.64
• Employer contribution: (£600 - £96) × 15% = £75.60

The employee deduction comes from their wages. Your employer contribution is an additional cost on top of their salary.

National Insurance Category Letters

Different employees may have different category letters assigned to them, which affects the rates you deduct. The most common categories are:

Category A: The standard rate for most employees.

Category C: For employees over State Pension age who don't pay National Insurance (though you as employer still pay 15%).

Category H: Apprentices under 25. You don't pay employer contributions on earnings up to £967 per week, though you pay 15% on anything above that.

Category M: Employees under 21. Like apprentices, you don't pay employer contributions on earnings up to £967 per week.

Category V: Veterans in their first year of civilian employment. Again, no employer contributions up to £967 per week.

Other category letters apply to specific circumstances including Freeport employment, Investment Zones, married women with reduced rate elections, and deferment cases.

Special Thresholds for Certain Employees

If you employ people under 21, apprentices under 25, or qualifying veterans, a higher "upper secondary threshold" of £967 per week (£4,189 per month, £50,270 per year) applies. You don't pay employer National Insurance on their earnings up to this level—a significant saving compared to the standard £96 per week threshold.

Freeport and Investment Zone employees have their own thresholds and category letters, with an upper secondary threshold of £481 per week (£2,083 per month, £25,000 per year) where special employer contribution rules apply.

How to Calculate and Pay NICs

You don't need to calculate National Insurance manually. HMRC requires you to use payroll software, which automatically:

• Applies the correct thresholds based on your pay frequency (weekly, monthly, etc.)
• Uses each employee's category letter to calculate the right rates
• Deducts employee contributions from gross pay
• Calculates your employer liability
• Reports everything to HMRC through Real Time Information (RTI)

You pay both employee deductions and employer contributions to HMRC together with income tax deductions. Payment is due by the 22nd of the following month (or 19th if paying by post).

Key Points to Remember

National Insurance is collected through PAYE alongside income tax, but the thresholds and rates are completely separate from income tax bands. An employee can be paying National Insurance before they pay any income tax, and you as an employer pay contributions on earnings from just £96 per week.

Always ensure your payroll software has the correct category letter for each employee, as this significantly affects how much National Insurance is due. Using the wrong category can result in underpayment or overpayment.

Both employee and employer National Insurance contributions count as allowable business expenses for Corporation Tax or income tax purposes, reducing your overall tax bill.

Sources

• Rates and thresholds for employers 2025 to 2026

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.