How to manage National Insurance contributions

What are National Insurance contributions?

National Insurance contributions (NICs) are a tax on earnings paid by both employees and employers to HMRC. These contributions go into a fund that pays for some state benefits, including the state pension, maternity leave and unemployment benefits.

Anyone from age 16 to State Pension age must pay National Insurance if they’re either:

• employed and earn above the primary threshold, currently £12,570, for the 2023/24 tax year
• self-employed with profits of £12,570 or more in the 2023/24 tax year

How is National Insurance assigned?

There are different types of National Insurance (NI), known as classes. Employees and some limited company directors (who might be employees of their own company) pay Class 1 NI contributions.

The self-employed pay Class 2 or Class 4 contributions. Class 3 are voluntary contributions that someone pays HMRC to fill in gaps in their National Insurance record.

When you employ someone you must ask for their National Insurance number for your payroll records. Each UK resident over 16 has a unique National Insurance (NI) number. HMRC uses this to identify their National Insurance contribution records.

What are Category A National Insurance contributions?

The amount of National Insurance an employee pays depends on their National Insurance category letter and the income threshold they fall into. As an employer, you’ll need to work out your employees’ category letters to calculate how much both you and they need to contribute.

Most employees will fall under Category A, but you can find out more about the other categories on the gov.uk website.

Employee National Insurance contributions

Employees pay National Insurance contributions on their earnings. Contribution rates are based on employees’ weekly earnings but will be deducted as part of their regular pay, commonly monthly or weekly payrolls. It’s your responsibility as an employer to deduct these from employee pay and forward them to HMRC. You can use HMRC’s payroll calculators to check NI contributions.

Company directors who are employees of their own company pay National Insurance on their annual income from salary and bonuses above the primary threshold, currently £12,570 for the 2023/24 tax year.

Contributions for directors are worked out from their annual earnings and they can choose to either pay contributions each pay period or once their accumulated earnings reach the NI threshold that requires deduction to be made.

Employer National Insurance contributions

As well as deducting Class 1 National Insurance contributions from your employees’ earnings, you also need to pay National Insurance as an employer. These are known as secondary contributions. Again, the amount you pay depends on which National Insurance category letter an employee has, but most employees who are over 21 in age will be in category A.

There are some exceptions to employer National Insurance contributions, such as:

• employees under 21
• apprentices under 25
• armed forces veterans
• Freeport employees

Employers are also liable to pay Class 1A NICs on employee benefits in kind and some termination payments. Examples of benefits that are liable to Class 1A NICs are private health care, company cars and non contractual termination payments over £30,000. These need to be reported and paid at the end of each tax year. Benefits in kind are also known as company benefits.

How to file National Insurance contributions with HMRC

Class 1 and 1A, National Insurance contributions are collected through PAYE. Using payroll software, you can report employee deductions and payments to HMRC in a Full Payment Submission (FPS) every pay run.

After you’ve sent your FPS, you’ll be able to view how much you owe in your HMRC online account. You’ll need to pay the full balance by the 22nd of the following tax month. There are many ways to pay what you owe – including bank transfer, direct debit, and cheque. Find out more about how to pay your National Insurance bill.

What is the National Insurance Employment Allowance scheme?

The National Insurance Employment Allowance scheme is designed to ease the tax burden on small businesses by allowing eligible employers to reduce their NI liability by up to £5,000 each tax year.

You can claim it if your employer’s Class 1 NI contributions were less than £100,000 in the previous tax year. As part of the scheme you’ll pay less employer’s National Insurance until the end of the tax year, or until the £5,000 allowance is up – whichever comes first. The National Insurance Employment Allowance scheme doesn’t apply to workers under IR35 (off-payroll workers), so their payroll costs don’t count towards the £100,000 threshold. What’s more, each employer can only claim this allowance once under their PAYE scheme.

If you’re a Xero customer and existing Xero Payroll user, you can claim the allowance at any time throughout the year using your payroll software.

Staying on top of National Insurance contributions

As an employer you also need to keep on top of any changes to National Insurance contributions and new legislation, so you can properly run payroll and keep employees informed.

Xero’s cloud accounting software makes it simple to stay on top of your obligations to HMRC. Find out more about Xero’s payroll and product features that can help you build a healthy business.