What is National Insurance and what it means for your business

What is National Insurance?

National Insurance (NI) is a tax that funds some state benefits in the UK, like the State Pension, maternity allowances, and job seeker support.

But how does National Insurance work? The system functions by collecting National Insurance contributions from both employees and employers:

• Employees pay National Insurance as an automatic deduction from their income
• Employers pay National Insurance contributions to HMRC on top of their employees’ wages
• Self-employed individuals pay through the self-assessment system

Employer National Insurance: what businesses need to know and do

Employers are responsible for deducting National Insurance contributions (NICs) from their employees’ earnings every payroll. Employers also pay an extra contribution on top that is based on the employee’s earnings but is not deducted from the employee’s salary.

You’ll first need to register your business for National Insurance, and then get info on:

1. The deadlines and reporting requirements for National Insurance

2. The amounts to pay for each employee, and for your direct employer contribution, which depend on:

• Your employees’ National Insurance class
• The current HMRC thresholds and contributions rates
• Categories your employees fall into

Learn more about employer responsibilities for National Insurance contributions.

Registering for National Insurance as a business

Understanding national insurance for businesses begins with registration. All employers must register with HMRC and set up PAYE (pay as you earn) before hiring employees.

PAYE is the system HMRC uses to collect income tax and UK National Insurance contributions directly from an employee’s pay cheque. All employers must set up a PAYE scheme – here’s how to do this.

National insurance payment deadlines and reporting requirements

Employers report and pay National Insurance contributions (NICs) to HMRC using a Full Payment Submission (FPS) – a mandatory report employers submit to HMRC each payday that includes employee earnings, tax deducted, and NICs. Payroll software like Xero can send your FPSs for you.

You must pay NICs to HMRC by the 22nd of the month following your pay run, or the 19th if paying by post or cheque.

If you miss the deadline, you can be hit with penalties for non-compliance. Learn more about late PAYE penalties.

What to pay: how National Insurance contributions are determined

Here are the National Insurance employee classes, thresholds, rates, and categories that determine your National Insurance bill.

Classes of National Insurance

The HMRC groups individuals into different types of National Insurance, known as classes. These groups are based mainly on whether you’re employed or self-employed, and determine who pays National Insurance and how much.

• Class 1: paid by employees and employers on earnings above specific thresholds. The class most employees fall into.
• Class 1A and 1B: paid by employers on benefits-in-kind (company cars, health insurance, for example)
• Class 2: paid by self-employed businesspeople at a weekly rate of £3.45 to qualify for state benefits
• Class 3: voluntary contributions to fill National Insurance gaps and maintain eligibility for state benefits
• Class 4: paid by self-employed businesspeople on profits – 6% on annual earnings between £12,570 and £50,270, 2% on earnings above that

Learn more about National Insurance for the self-employed

National Insurance thresholds and rates

National Insurance is only payable when earnings exceed specific thresholds. These thresholds determine the rate paid by both employees and employers.

• Your employees start paying National Insurance at 8% once they earn £1,048/month or more (the ‘Primary Threshold’). The rate is currently 8%. Once their earnings pass the upper earning limit (currently £4,189/month) their NIC rate falls to 2%.
• You (as an employer) start making NICs on each employee’s earnings above £417/month. The rate is currently 15%.

Contribution rates and thresholds are reviewed annually in the government’s budget.

National Insurance categories for your employees

National Insurance categories determine how much an employee contributes based on the monthly earning limits. Some categories can lower the rates an employee must pay based on their age, tax status, and other circumstances.

The most common NI categories are:

• Category A: most employees under State Pension age (66).
• Category B: married women and widows entitled to pay NICs at a lower rate.
• Category C: employees over State Pension age.
• Category H: apprentices under age 25.
• Category J: employees with multiple jobs who are deferring some NICs.
• Category M: employees under age 21.

Here’s the full list of rates and categories. This page links to the rates that apply for each category, too.

National Insurance relief for employers

Employers may be eligible for reliefs and exemptions to help the costs of National Insurance for small businesses. Here are typical ways to reduce your NI bill:

• Employment Allowance: Small businesses can claim up to £5,000 per year, provided their employer NICs were less than £100,000 in the previous tax year.
• Apprenticeship Relief: Employers do not pay NICs for apprentices under 25 years old earning below a certain threshold.
• Directors’ NI contributions: Limited company directors can structure their salary and dividend payments in a tax-efficient way to reduce NI liabilities.

You apply for these reliefs through HMRC, typically via your payroll software or PAYE online account.

Learn more about the Employment Allowance and NI for company directors.

How to calculate National Insurance

Here’s a demonstration of how to calculate your employee and employer Class 1 National Insurance contributions, using the current thresholds and rates.

We’ll also provide an example NICs calculation for a hypothetical employee earning £3,000 per month.

To calculate national insurance for yourself – or to cross-check the figures – use HMRC’s National Insurance calculator or payroll software such as Xero.

1. Identify the relevant National Insurance thresholds

Start by applying the thresholds for the tax year you’re in. Here are the thresholds for the 2025/26 tax year:

• Primary Threshold (the point the employee starts paying NI): £1,048 per month
• Secondary Threshold (the point the employer starts paying NI): £417 per month
• Upper Earnings Limit (the point the employee’s rate reduces): £4,189 per month

In our example, the employee’s £3,000 per month salary is above the primary and secondary thresholds, meaning both employee and employer contributions are required.

And because the income is below the upper earnings limit, the employee pays the standard rate on each pound they earn.

2. Determine the NI category

Next, identify the employee’s National Insurance category, which determines the rates that apply.

Most full-time employees are in Category A. There are some special cases, such as apprentices, under 21s, or employees with special tax status who may have reduced or zero NI contributions.

Our example employee falls in Category A, so standard National Insurance rates apply.

3. Apply the correct NI rates

Once the NI category is confirmed, apply the relevant contribution rates.

For Category A employees in the 2025/26 tax year:

• Employees pay 8% on earnings above the Primary Threshold, and 2% on earnings above the Upper Earnings Limit.
• Employers pay 15% on earnings above the Secondary Threshold.

Our example employee’s £3,000 per month salary puts them within the 8% band for employee contributions and 15% for employer contributions.

4. Calculate your employee NI contributions

Once you’ve identified the employee’s earnings and confirmed their NI category, calculate the contribution using the rate bands that apply.

For our example employee who earns £3,000 per month and who falls into Category A, their contribution is based on two bands:

• Earnings below the Primary Threshold (£1,048): taxed at 0%
• Earnings from £1,048 to £4,189: taxed at 8%

So the formula is: (Total earnings – Primary Threshold) × 8%

• £3,000 – £1,048 = £1,952 taxable earnings
• £1,952 x 8% = £156.16 per month in NI contributions (deducted from gross salary)

The employee must pay £156.16 per month in NI contributions (deducted from their salary).

5. Calculate your employer NI contributions

Your employer National Insurance contributions are calculated separately from the employee’s, using the rate that applies for the Secondary Threshold. For Category A employees, the standard employer rate is 15%.

• Earnings up to the Secondary Threshold (£417/month): taxed at 0%
• Earnings above the Secondary Threshold: taxed at 15%

So the formula is:

(Total earnings – Secondary Threshold) × 15% (Total earnings – £417) × 15%

In our example, the employer of the employee earning £3,000 per month must pay:

• £3,000 – £417 = £2,583 taxable earnings
• £2,583 x 15% = £387.45

The employer must pay £387.45 per month in NI for this employee.

So for our employee earning £3,000 per month, the total NI liability reported and paid to HMRC each month is:

£156.16 (employee) + £387.45 (employer) = £543.61

6. Check your work with an online calculator

Digital tools are great when you have a large or complex payroll. They eliminate errors and make sure you’re complying with HMRC regulations.

• Xero's payroll software – automates calculations and submissions for multiple employees
• There’s also HMRC’s NI calculator – useful for one-off checks or verifying calculations.

7. Report and submit your NICs to HMRC

Report your NI contributions via PAYE payroll and submit to HMRC monthly. Payments are due by the 22nd of the month – 19th if paying by post/cheque.

If you’re late or your payments are wrong, you might be penalised or charged interest.

At the end of each tax year, employers must issue a P60 for each employee, which summarises their total income and deductions. Here’s more about P60s.

Simplify your National Insurance with Xero

Xero helps you duck the hassle of keeping up with National Insurance responsibilities. Xero payroll software automates employees’ earning and NI contribution calculations, and lets you submit your pay runs to HMRC directly from the software. Compliance sorted, time saved, risk reduced..

Streamline your payroll and National Insurance with Xero