National Insurance (NI) is one of the most consequential deductions processed through payroll—and, in many organisations, one of the least well understood. Employees see it on their payslips each month. Employers account for it as part of every new hire’s total cost. Payroll teams process it with every pay run. Yet the full picture—who pays what, under which class, at what rate, and for what purpose—is often unclear.
This guide sets out the core facts: what National Insurance contributions (NICs) are, how they are structured, what changed in April 2025, and what every employer and employee in the UK should understand before the next pay run.
For organisations managing payroll at scale, applying the correct NI treatment across a workforce—including different category letters, freeport rules, and employer rate changes—is a compliance-critical task. Getting it right requires a solid understanding of the fundamentals covered here. For a broader view of how payroll functions as a whole, see our guide on how payroll software works.
What is national insurance and what does it fund?
National Insurance is a mandatory contribution system operated by His Majesty’s Revenue and Customs (HMRC) in the United Kingdom. Both employees and employers contribute, and the funds collected support a range of state-funded services and benefits.
The services supported by NI contributions include:
- The State Pension: requires 35 qualifying years of contributions or credits for the full amount
- The National Health Service (NHS)
- Maternity Allowance for those not eligible for Statutory Maternity Pay
- Jobseeker’s Allowance (JSA)
- Employment and Support Allowance (ESA) for those unable to work due to illness or disability
- Bereavement Support Payment
It is important to note that National Insurance is not the same as Income Tax, though both are deducted via Pay As You Earn (PAYE). Income Tax applies progressively across a wider range of income sources. National Insurance operates on a distinct threshold and rate structure, specific to your employment status and category. For a full comparison of how tax and NI interact on a payslip, see our related content on in-house payroll management.
Who pays national insurance?
You are required to pay National Insurance if you are aged 16 or over and either:
- An employee earning more than £242 per week from a single job, or
- Self-employed with annual profits exceeding £12,570.
Contributions stop at different points depending on your employment status:
- Employed: you may choose to stop paying Class 1 NICs when you reach State Pension age, even if you continue working.
- Self-employed: Class 4 NI stops from 6 April (the start of the tax year) after you reach State Pension age.
National insurance numbers
Every individual in the UK is assigned a unique National Insurance number — a reference of two letters, six digits, and one final letter. This number is issued at age 16, or when a person establishes the right to work in the UK. It remains unchanged for life and links your name to your contributions and tax record.
You will need your NI number when starting a new job, applying for a student loan, or claiming certain benefits. It can be found on payslips, a P60, or any correspondence from HMRC. If you cannot locate it, HMRC provides an option to find your National Insurance number online.
The five classes of national insurance
National Insurance is divided into classes based on employment status and the nature of the payment. Each class determines the applicable rates, thresholds, and which party is responsible for paying.
| NI Class | Who Pays | Key Trigger |
|---|---|---|
| Class 1 | Employees and employers | Employee earnings above £242/week; employer pays above £96/week (£5,000/year) |
| Class 1A / 1B | Employers only | Benefits in kind or expenses (e.g. company cars, private medical insurance) |
| Class 2 | Self-employed individuals | Voluntary from April 2024; previously mandatory above £12,570/year profit |
| Class 3 | Individuals voluntarily | To fill gaps in NI record and protect State Pension entitlement |
| Class 4 | Self-employed individuals | Annual profits of £12,570 or more |
For most employed individuals and their employers, Class 1 NICs are the primary concern—and the class most directly affected by the changes introduced in April 2025.
What changed in April 2025
Two significant adjustments to employer National Insurance took effect from April 2025:
- The employer NI rate increased from 13.8% to 15%.
- The Secondary Threshold—the point at which employers begin paying NI—was reduced from £9,100 per year to £5,000 per year (£96 per week / £417 per month).
The combined effect is that employers now pay a higher rate on a broader range of earnings. For organisations with a high proportion of part-time or lower-paid employees, this represents a material increase in employment costs. Understanding the correct category letters for each employee group is essential to ensure contributions are calculated accurately.
National insurance category letters: a practical reference
Category letters are the mechanism through which PAYE payroll systems apply the correct NI rates to each individual. Your employer assigns a category letter based on your circumstances—it is not something employees typically need to manage themselves, but it is useful for employers, payroll teams, and finance functions to understand in full.
Standard category letters
| Category Letter | Employee Group |
|---|---|
| A | All employees not covered by another category in this table |
| B | Married women and widows holding a valid certificate of election entitling them to pay reduced NICs |
| C | Employees who have reached State Pension age |
| H | Apprentices aged under 25 |
| J | Employees deferring NI because they are already paying it in a second job |
| M | Employees aged under 21 |
| V | Employees in their first job following service in the armed forces (veterans) |
| X | Employees not liable to pay NI (e.g. those under 16) |
| Z | Employees under 21 who are deferring NI due to contributions in another job |
Category letters for freeport employees
Freeports are government-designated areas with distinct customs and tax arrangements. Employees working within a freeport are subject to their own category letter scheme:
| Category Letter | Freeport Employee Group |
|---|---|
| F | All freeport employees not covered by another category in this table |
| I | Married women and widows in freeports entitled to pay reduced NICs |
| L | Freeport employees deferring NI due to contributions in another job |
| S | Freeport employees who have reached State Pension age |
Category letters for investment zone employees
| Category Letter | Investment Zone Employee Group |
|---|---|
| N | Standard category |
| E | Married women and widows entitled to pay reduced NICs |
| K | Employees over State Pension age |
| D | Employees deferring 12% NICs and paying only 2% because they pay NI in another job |
National insurance thresholds for 2026/27
Thresholds determine at which earnings levels NI contributions start, change rate, or cease. The table below sets out the confirmed thresholds for the 2026/27 tax year.
| Threshold | Weekly (£) | Monthly (£) | Annual (£) |
|---|---|---|---|
| Lower Earnings Limit (LEL) | £129 | £559 | £6,708 |
| Primary Threshold (PT) | £242 | £1,048 | £12,570 |
| Secondary Threshold (ST) | £96 | £417 | £5,000 |
| Upper Earnings Limit (UEL) | £967 | £4,189 | £50,270 |
| Upper Secondary Threshold — Under 21 (UST) | £967 | £4,189 | £50,270 |
| Apprentice Upper Secondary Threshold (AUST) | £967 | £4,189 | £50,270 |
| Veterans Upper Secondary Threshold (VUST) | £967 | £4,189 | £50,270 |
| Freeport Upper Secondary Threshold (FUST) | £481 | £2,083 | £25,000 |
| Investment Zone Upper Secondary Threshold (IVUST) | £481 | £2,083 | £25,000 |
A note on threshold terminology. The Secondary Threshold (ST) is the point above which employers begin paying NI. The Primary Threshold (PT) is the point above which employees begin paying. The Upper Earnings Limit (UEL) marks the point where the employee NI rate reduces. These are distinct figures and affect employer and employee contributions differently.
Employee NI contribution rates by category (2026/27)
The rates below reflect the primary contributions deducted from employees’ pay via PAYE. They are applied to weekly earnings within the specified bands.
| Category Letters | £129–£242/week (£542–£1,048/month) | £242.01–£967/week (£1,048–£4,189/month) | Above £967/week (£4,189+/month) |
|---|---|---|---|
| A, F, H, M, N, V | 0% | 8% | 2% |
| B, E, I | 0% | 1.85% | 2% |
| D, J, L, Z | 0% | 2% | 2% |
| C, K, S | Nil | Nil | Nil |
Worked example: Category A employee
Consider an employee on category A who earns £1,000 in a given week. Their NI liability is calculated as follows:
- £0 on the first £242 (below the Primary Threshold)
- 8% on earnings between £242.01 and £967 = £58.00
- 2% on earnings above £967 = £0.66
Total employee NI contribution: £58.66 for that week.
Employer NI contribution rates by category (2026/27)
Employer contributions are paid by the organisation directly to HMRC and are separate from—and in addition to—the NI deducted from employees’ pay. The rates below apply from the Secondary Threshold upward.
| Category Letters | ST to LEL | LEL to UEL/UST/AUST | FUST to UEL/UST/AUST/VUST | Above UEL/UST/AUST/VUST |
|---|---|---|---|---|
| A, B, C, J | 15% | 15% | 15% | 15% |
| H, M, V, Z | 0% | 0% | 0% | 15% |
| D, E, F, I, K, L, N, S | 0% | 0% | 15% | 15% |
The zero rates for categories H, M, V, and Z (up to their upper secondary thresholds) reflect government policy to reduce NI costs for employers taking on apprentices, employees under 21, and veterans. This distinction has direct implications for pay structures and total employment cost planning.
Salary sacrifice and national insurance
Salary sacrifice is a formal arrangement between an employer and employee in which the employee agrees to reduce their gross salary in exchange for a non-cash benefit — such as increased pension contributions, a cycle-to-work scheme, childcare vouchers, or additional annual leave.
Because salary sacrifice is applied before NI is calculated, it reduces the gross figure on which both employee and employer NI are assessed. This means both parties pay less NI as a result.
Example:
- An employee agrees to sacrifice £100 per month toward their pension.
- That £100 is excluded from the NI calculation.
- At an 8% employee rate and 15% employer rate, this saves the employee approximately £8 and the employer approximately £15 per month in NI on that amount alone.
However, salary sacrifice is not appropriate in all circumstances. The reduction in gross salary can affect:
- Entitlement to state benefits linked to earnings, including Statutory Maternity Pay
- State Pension qualifying earnings
- Mortgage and lending assessments based on declared income
- Life assurance cover calculated as a multiple of salary
Organisations should ensure that employees are given clear information before entering into a salary sacrifice arrangement, and that payroll systems apply the pre-sacrifice figure consistently. For help managing these arrangements through a fully managed service, visit our payroll outsourcing page.
Gaps in your national insurance record
A gap in your NI record occurs when a year does not contain sufficient contributions or NI credits to count as a qualifying year. To receive the full new State Pension, you need 35 qualifying years. Gaps can arise in a number of ways:
- Periods of employment with earnings below the Lower Earnings Limit
- Years spent living or working outside the UK
- Self-employment with profits below the relevant threshold
- Periods of unemployment where no benefit claim was made
You can review your NI record and State Pension forecast via the HMRC online portal. The table below sets out whether voluntary contributions are likely to be worthwhile in different situations:
| Scenario | Consider Voluntary Contributions? |
|---|---|
| Low earnings in a given year created a record gap | Yes, if the gap would otherwise reduce your qualifying years |
| Lived or worked abroad with no UK NI credits | Likely yes — check your forecast first |
| Approaching retirement with fewer than 35 qualifying years | Yes — the cost is typically lower than the pension gain |
| Currently on benefits that include NI credits | Generally not necessary |
| Already have 35 or more qualifying years | No, unless planning to retire early |
HMRC’s online tools allow you to check your National Insurance record, view your State Pension forecast, and assess whether voluntary contributions would improve your position.
Manage national insurance accurately, without the complexity
National Insurance is one of the most technically involved aspects of running payroll in the UK. Between employer rate changes, multiple category letters, threshold adjustments, freeport and investment zone rules, and the interaction between salary sacrifice and benefit calculations, the margin for error is real — and the consequences of getting it wrong include financial penalties and incorrect employee deductions.
Keeping payroll compliant also means staying current with HMRC guidance. The HMRC National Insurance overview provides the official position on current thresholds and voluntary contribution rules.
At Just Payroll Services, our team of CIPP-qualified payroll specialists handles NI calculations, category letter assignment, employer contribution reporting, and HMRC submissions as part of a fully managed payroll service. Whether you are looking to outsource payroll for the first time or improve the accuracy of an existing function, our specialists are available to discuss your requirements.
Explore our payroll outsourcing services, find out about our auto-enrolment support, or contact us directly to speak with a member of our team.