National Insurance Explained: Who Pays What in 2025-26
National Insurance is a separate levy from income tax — with its own rates, thresholds, and classes. It funds the State Pension and NHS, and understanding it is key to knowing your true cost of employment.
What is National Insurance For?
National Insurance (NI) is a payroll tax that funds the State Pension, the NHS, Jobseeker's Allowance, and other contributory benefits. Unlike income tax, which funds general government spending, NI is notionally linked to specific entitlements — particularly your State Pension record. Every qualifying year of NI contributions adds to the pension you will receive in retirement.
NI is collected through PAYE alongside income tax, but the two are calculated separately and have different thresholds and rates. You can be paying 2% NI at the same time as paying 40% income tax on the same earnings.
Class 1: Employee and Employer NI
Class 1 applies to employees and their employers. The rates for 2025-26 are:
| Earnings | Employee Rate | Employer Rate |
|---|---|---|
| Up to £5,000/year | 0% | 0% |
| £5,001–£12,570/year | 0% | 13.8% |
| £12,571–£50,270/year | 8% | 13.8% |
| Above £50,270/year | 2% | 13.8% |
Key April 2025 change: The employer Secondary Threshold dropped from £9,100 to £5,000 per year. This means employers now start paying 13.8% NI on lower-paid workers much sooner — significantly increasing the cost of employment for part-time and lower-wage workers. The Employment Allowance also increased to £10,500 to offset some of this for smaller businesses.
For an employee on a £35,000 salary: NI = (£35,000 − £12,570) × 8% = £22,430 × 8% = £1,794/year. Their employer also pays 13.8% on everything above £5,000 — for the same employee that's roughly £4,130 in employer NI on top.
Class 2 and Class 4: Self-Employed NI
Self-employed workers pay two separate NI classes:
- Class 2: £3.45 per week if annual profits exceed £12,570. This is a flat-rate contribution that builds your State Pension entitlement. If your profits are below £12,570, paying Class 2 is voluntary but often worthwhile — each year costs only £179.40 and counts as a full qualifying year for State Pension.
- Class 4: 6% on profits between £12,570 and £50,270, then 2% on profits above £50,270. Class 4 does not count towards State Pension entitlement — it is effectively an additional income tax on self-employed profits.
Example: self-employed profit of £40,000. Class 2: £3.45 × 52 = £179.40. Class 4: (£40,000 − £12,570) × 6% = £27,430 × 6% = £1,645.80. Total NI: £1,825.20.
Director NI: Annual Rather Than Monthly
Directors of limited companies have their NI calculated on an annual basis rather than monthly. This prevents the tax advantage that would come from paying a large salary in one month and nothing in other months. The director's NI is recalculated at the end of each tax year using the annual earnings period method, so the total NI liability equals what it would have been if earnings were spread evenly.
NI and Your State Pension
The New State Pension in 2025-26 is £230.25 per week (£11,973/year). To receive the full amount, you need 35 qualifying years of NI contributions. You need at least 10 qualifying years to receive any State Pension at all.
A qualifying year is one where you paid NI contributions (or received NI credits — e.g., while claiming Child Benefit, Jobseeker's Allowance, or certain other benefits). Years where you earned below the Lower Earnings Limit (£6,396 in 2025-26) do not count as qualifying years, even if you were employed.
Gaps in your record: You can fill gaps by paying voluntary Class 3 contributions at £17.45 per week (£907.40/year). Given that each qualifying year is worth approximately £6.58/week in pension (£342/year), filling a gap costs roughly £907 and returns ~£342 per year for life — usually an excellent return.
Frequently Asked Questions
Is National Insurance the same as income tax?
No. They are two separate charges, both collected through PAYE. Income tax funds general spending; National Insurance funds the State Pension, NHS, and contributory benefits. They have different rates, different thresholds, and different rules for the self-employed.
How do I check my National Insurance record?
Log in to your Personal Tax Account at gov.uk/check-national-insurance-record. It shows qualifying years, gaps, and whether paying voluntary contributions would benefit you. Act on any gaps promptly — the rules around how far back you can fill gaps change over time.
Does paying National Insurance affect my State Pension?
Yes. Each qualifying year of NI contributions counts towards your State Pension entitlement. You need 35 qualifying years for the full New State Pension of £230.25 per week in 2025-26. Class 2 (self-employed) and Class 3 (voluntary) build qualifying years; Class 4 does not.