National Insurance FAQs – What You Need to Know
A practical guide for individuals, sole traders, directors and employers
1. What are National Insurance Contributions (NICs)?
NICs are payments made to HMRC by workers and employers. They help fund state benefits like the State Pension, Maternity Allowance, and Jobseeker’s Allowance.
Unlike income tax, NICs are not just based on income — they depend on your employment status, your level of earnings, and what class you fall into. They are mandatory once your income exceeds certain thresholds.
2. What are the different classes of NICs and who pays them?
| Class | Who Pays | When |
|---|---|---|
| Class 1 | Employees & employers | Paid through PAYE when salary exceeds thresholds |
| Class 1A/1B | Employers | On benefits in kind (e.g. company cars) |
| Class 2 | Self-employed | Flat rate, if profits exceed small profits threshold |
| Class 3 | Voluntary | To fill gaps in NI record (boost State Pension) |
| Class 4 | Self-employed | Percentage of annual profits above lower threshold |
For example:
-
A sole trader pays Class 2 and Class 4 NICs.
-
A director on payroll pays Class 1 (and the company pays employer NICs too).
3. What are the NIC thresholds and rates for 2024/25?
For Employees (Class 1 NICs)
- Primary threshold: £12,570/year (£1,048/month)
- Rate:
- 8% on earnings between £12,570 and £50,270
- 2% on earnings above £50,270
For Employers
- Secondary threshold: £9,100/year (£758/month)
- Rate: 13.8% on all earnings above that threshold
For the Self-Employed
- Class 2: £3.45/week (if profits over £6,725)
- Class 4:
- 6% on profits between £12,570 and £50,270
- 2% on profits over £50,270
Note: From April 2024, Class 2 NICs were abolished for most self-employed individuals earning above the threshold. They will continue to receive NI credits automatically.
4. What is the Employment Allowance?
The Employment Allowance is a relief that allows eligible employers to reduce their employer Class 1 NIC bill by up to £5,000 per year.
To qualify:
- Your total Class 1 employer NICs must be under £100,000 in the previous tax year.
- It’s not available if you’re the only employee who is also a director (e.g. one-person companies).
You can claim through your payroll software or directly via HMRC.
5. Do directors pay NIC differently?
Yes. Directors often pay NIC annually instead of monthly, using an annual earnings period. This means that NIC is calculated based on their total annual salary rather than month-by-month. This method often results in lower NICs if directors take a low salary and dividends.
Pro tip: Many directors pay themselves just above the Lower Earnings Limit (£6,396/year) to protect their State Pension entitlement without triggering actual NIC payments.
6. Can I avoid paying NIC altogether?
Not usually – but there are strategies to reduce your NICs, such as:
- Paying dividends instead of salary (for company directors)
- Hiring through the right structure (e.g. limited company vs. sole trader)
- Utilising allowances like the Employment Allowance
- Keeping salary below thresholds (e.g. under £12,570 to avoid employee NICs)
However, you should be careful not to fall below the Lower Earnings Limit unless you have another way to build up State Pension entitlement (e.g. via credits or voluntary contributions).
7. What happens if I underpay NIC or miss payments?
If you are employed, your NICs are usually handled by your employer via PAYE. But if you’re self-employed, you must ensure you:
- File your Self Assessment tax return
- Pay Class 2 and Class 4 NIC on time
Missing payments may result in:
- HMRC penalties and interest
- Gaps in your National Insurance record, affecting your State Pension eligibility
If you have gaps, you may be able to make Class 3 voluntary contributions to fill them, usually within 6 years.
8. What benefits do I get from paying NICs?
NICs build up entitlement to:
- Basic and new State Pension
- Maternity Allowance
- Jobseeker’s Allowance (JSA)
- Bereavement Support Payment
- Incapacity and Disability Benefits
You usually need 10 years of NI contributions to receive any State Pension, and 35 years to receive the full new State Pension.
9. Are NIC rates going to change in the future?
Yes – there are already confirmed changes for 2025:
- Employer NIC: Will increase from April 2025 as part of planned tax rises
- National Living Wage increases will push more workers above the NIC thresholds
- From April 2026, double cab pickups will be taxed as cars for NI purposes, increasing employer Class 1A NICs on benefit-in-kind value
It’s worth factoring these into payroll forecasts and salary strategies for business owners and employers.
10. How can I check my NIC record and State Pension forecast?
You can log into your Personal Tax Account on the GOV.UK website to:
- View your NI record
- Check for any gaps
- See your State Pension forecast
If there are gaps, you may be able to pay voluntary contributions to make up the difference.
Need Help Navigating NICs?
Whether you’re a sole trader, landlord, company director or employer, getting your National Insurance right can make a big difference to your tax efficiency and compliance.
Let Merranti Accounting help you stay ahead.
📞 Call us today on 01342 836 557
📧 Or email us at contactus@merranti.com
Our expert team will help you:
- Understand your obligations
- Minimise your tax liabilities
- Stay fully compliant with HMRC
