How to Calculate National Insurance (NI) for Employees and Employers
National Insurance contributions (NICs) have to be paid by both employed and self-employed workers, as well as employers. The amount you pay as a worker is calculated based on your gross earnings as an employee or your self-employed profits after expenses have been deducted. For employees, this may also include some expenses and benefits in kind paid by your employer.
- Of the six classes of National Insurance contributions, three apply to employees. They are:Class 1 – If you are employed on a payroll, you pay Class 1 NICs which are taken automatically via PAYE. Class 1 contributions are paid on salary, commission, bonuses, overtime, sick pay and maternity and paternity pay, and are calculated based on gross earnings (before tax and pension deductions) above the threshold for that year.
- Class 3 – These are voluntary contributions paid by those who want to protect their entitlement to a state pension but who do not pay sufficient earned or self-employed contributions. They can also be paid by those who aren’t working or work abroad.
- Class 3A – A new type of voluntary contribution was introduced in October 2015. This one-off lump sum payment allows those who reached state pension age by 6 April 2016 to bring their state pension in line with the new single-tier state pension.
Company directors are also classed as employees and pay National Insurance on annual income from salary and bonuses over a certain threshold. Contributions are worked out from their annual earnings rather than from what they earn in each pay period.
The actual calculation of NICs for employees is done using contribution tables that are given to your employer by HMRC. The amount payable is based on gross earnings between an upper and lower limit. You can read more about the National Insurance rates and categories here, or use the HMRC Tax Calculator to work how much you have to pay.
The self-employed usually pay 2 types of National Insurance contributions – Class 2 and Class 4:
- Class 2 – Class 2 contributions are paid on profits (earnings minus allowable expenses) above a certain threshold by those who are self-employed. Most people pay the contributions as part of their self assessment tax bill. The payment is just a small amount per week.
- Class 4 – The self-employed must also pay Class 4 contributions once their profits reach a certain level. Class 4 contributions are currently 9 percent of taxable profits within a certain threshold, falling to 2 percent of profits above that upper limit.
Employers pay Class 1A and Class 1B National Insurance contributions once a year on the expenses and benefits they give to their employees. These are paid as part of the employer’s PAYE bill.
- Class 1A – These are paid on work benefits employer’s give to their employees, such as a company mobile phone. They must be reported and paid at the end of each tax year.
- Class 1B – Class 1B contributions must be paid if an employer has a PAYE settlement agreement to make one annual payment to cover all the tax and NICs due on small or irregular taxable expenses or benefits for employees.