Employee National Insurance

Employees pay Class 1 National Insurance contributions. Minimising employees' Class 1 NI contributions directly benefits the employee. It also benefits the employer, by making it easier to recruit and retain employees

Class 1 National Insurance for employees

As an employee, you are liable for 'primary' Class 1 National Insurance contributions. Your employer pays 'secondary' Class 1 National Insurance contributions. Both types of Class 1 NI are collected through the PAYE system operated by the employer.

Employees' Class 1 NI contributions are charged at 8% on earnings between the primary threshold of £190 per week and the upper earnings limit of £967 per week. The Additional rate of NICs is payable at 2% on earnings above £967 per week.

Note: A blended rate 11.5% of Class 1 National Insurance contributions applied to company directors for the Annual Earnings Period for directors for the 2023/24 tax year.

Class 1 NI: special cases

Directors pay Class 1 NI contributions on their employment earnings at the same rates as other employees. But rather than using weekly or monthly earnings, Class 1 NI contributions are based on annual earnings. This means that directors who have fluctuating earnings will pay the same amount of Class 1 NI contributions as they would if their earnings were spread evenly through the year.

If you have more than one job, you can end up paying more Class 1 NI than is due, as NICs could be charged on too large an amount of your total earnings from all your jobs. You can apply to have some Class 1 NI deferred if this is likely to apply or reclaim the excess after the tax year end.

If you are both employed and self-employed, then it is possible to end up paying more in employee's Class 1 and self-employed NICs than the total annual limit payable. Again, some contributions can be deferred or reclaimed.

Class 1 NI contributions are payable on almost all cash payments an employee receives. Cash tips received directly from a customer, or where the employer has no influence over how tips are shared out, are exempt from NI (but are still taxable). Compulsory service charges are not exempt.

Minimising Class 1 National Insurance

Employees' Class 1 NI contributions are payable on any cash payments, including bonuses and other incentive payments. But Class 1 NI is not generally payable on benefits unless they are either cash or cash-like (for example, vouchers that can be exchanged for cash). So employee benefits such as childcare vouchers can be a useful way of reducing Class 1 NI contributions payable (and in some cases tax as well).

The most significant benefit can be employers' pension contributions. If an employer contributes directly to the employee's pension scheme, no Class 1 NI contributions are payable by either employer or employee. A properly arranged salary sacrifice scheme - where employees accept a lower salary but receive higher pension contributions - offers significant Class 1 NI savings. However, care should be taken to make sure that the arrangements do not take an employee's hourly wage below the NMW.

If you own your own company, you may be able to make substantial Class 1 NI savings by taking dividends rather than salary. Dividends can only be paid out of distributable profits (so not if the company has accumulated losses) following proper procedures, and cannot be paid selectively only to chosen shareholders. Dividend income over the current allowance of £500 will be subject to tax.

The 'IR35' rules on personal services companies, and rules on managed services companies, have made it difficult to take advantage of this if you are providing personal services through a company (for example, as an IT contractor). In these cases, the rules broadly ensure that the tax and NI treatment of any payment - including dividends - is the same as for employment income.