National Insurance Contributions (NICs): What You Need to Know in 2025/26
NICs Explained — More Than Just a Payslip Deduction
When people think of tax, they usually think of income tax or VAT — but National Insurance Contributions (NICs) are just as important, especially for business owners, director-shareholders, and the self-employed.
NICs aren’t just another tax; they’re a key part of how you qualify for:
- The State Pension
- Certain state benefits
- Maternity allowance, and more
But the system is often misunderstood, particularly since rates, thresholds and rules differ depending on your employment status.
In this guide, we break down:
-
What NICs are
-
Who pays them and how much
-
The 2025/26 changes
-
Tax planning tips for directors and the self-employed
What Are National Insurance Contributions (NICs)?
NICs are paid by:
- Employees
- Employers
- Self-employed individuals
The money goes towards state benefits, including:
- State Pension
- Statutory Sick Pay
- Maternity Pay
- Unemployment support
Unlike income tax, NICs do not apply to all income and have different rules for each group.
NICs for Employees (Class 1)
In 2025/26:
- Employee NICs:
- 0% on earnings up to £12,570
- 8% on earnings between £12,570 and £50,270
- 2% on earnings above £50,270
- Employer NICs:
- 15% on earnings above £5,000 per year
Employers also have to pay NICs on most employee benefits, such as company cars or health insurance.
Tip for employers: Use the £10,500 Employment Allowance (if eligible) to reduce your NIC bill.
NICs for the Self-Employed (Class 2 and 4)
Self-employed people pay:
- Class 2 NICs: Flat rate of £3.45/week (if profits exceed £6,725)
- Class 4 NICs:
- 0% up to £12,570
- 6% between £12,570 and £50,270
- 2% above £50,270
From 2024/25, Class 2 NICs are being phased out for most people — but many may choose to pay voluntarily to protect their State Pension.
NICs for Directors (Class 1 – Annual Earnings Method)
Director-shareholders are classed as employees but are assessed differently:
- NICs are calculated on annual earnings, not weekly/monthly
- This allows for greater planning flexibility
In most cases, directors take a small salary (e.g. £12,570) to:
- Stay under income tax and NIC thresholds
- Secure a qualifying year for the State Pension (must exceed £6,500)
Tip: Director salaries between £6,500 and £12,570 attract no NICs, but still count as a qualifying year for pension purposes.
What Changed in 2025/26?
Some of the key changes this tax year include:
- Employer NIC threshold frozen at £5,000
- Employee NIC rate reduced to 8% (down from 10%)
- Class 4 NICs for self-employed also reduced to 6%
But despite the rate reductions, the thresholds have not risen with inflation, meaning more income is subject to NICs — a stealth tax increase in real terms.
NIC Planning for Small Business Owners
If you run a limited company, NICs are a key part of profit extraction planning.
A popular tax-efficient strategy:
- Take a salary of £12,570
- Extract additional income as dividends (not subject to NICs)
Example for 2025/26:
- Salary = £12,570 (no employee NICs)
- Employer NICs = £1,135.50 (on salary above £5,000)
- But salary and NICs are tax-deductible, so you save corporation tax
- Dividends = taxed at 8.75% / 33.75% / 39.35%, but no NICs apply
Important: If you’re the only director and employee, you won’t qualify for the Employment Allowance, so employer NICs are payable in full.
Common Questions We Get at Merranti
Do I need to pay NICs to get a State Pension?
Yes — you generally need 35 qualifying years to receive the full new State Pension. Even low earners can achieve this with a salary above the Lower Earnings Limit (£6,500).
Can I make voluntary NIC payments?
Yes — especially useful if:
- You’re self-employed and below the Class 2 threshold
- You’ve missed previous years and want to fill gaps for pension qualification
Are dividends subject to NICs?
No — this is one reason why dividends are often preferred for income above a director’s salary.
Merranti’s Quick NICs Summary (2025/26)
| Category | NIC Type | Rate/Threshold |
|---|---|---|
| Employees | Class 1 | 8% (up to £50,270), 2% above |
| Employers | Class 1 | 15% over £5,000 (per employee) |
| Self-Employed | Class 2 + 4 | £3.45/week + 6%/2% (profits) |
| Directors (Ltd Co) | Class 1 (annual calc) | NICs based on annual threshold (£12,570) |
| Employment Allowance | — | £10,500 (conditions apply) |
Final Thoughts: Don’t Overpay on NICs
NICs might not get the attention that income tax does — but overpaying (or underplanning) can cost you dearly in both tax bills and lost pension entitlements.
Whether you’re self-employed, running a limited company, or employing staff, understanding your NIC obligations and opportunities is essential.
Talk to Merranti About Your National Insurance Planning
At Merranti Accounting, we help:
- Business owners extract profits tax-efficiently
- Self-employed individuals understand their NIC options
- Employers claim Employment Allowance correctly
- Directors ensure they meet pension requirements without overpaying NICs
