National Insurance Explained: Complete Guide for 2025-2026
Everything you need to know about National Insurance contributions, including rates, thresholds, what it pays for, and how it's calculated on your salary.
National Insurance (NI) is one of the most significant deductions from your salary, yet it's often misunderstood. While it's commonly thought of as just another tax, National Insurance serves a specific purpose: it builds your entitlement to certain state benefits, most importantly your state pension.
Unlike income tax, National Insurance only applies to earned income (from employment or self-employment). It doesn't apply to pension income, investment income, or rental income. This guide covers Class 1 National Insurance for employees - the type that's automatically deducted from your salary through PAYE.
Employee National Insurance
Employer National Insurance
Employer NI is paid by your employer on top of your salary. It doesn't affect your take-home pay but increases your total employment cost.
What is National Insurance?
National Insurance is a tax on earnings that was introduced in 1911 to fund social insurance programs. Today, it funds a range of state benefits and services, and builds your entitlement to certain benefits, particularly the state pension.
Direct Funding
- • NHS (National Health Service)
- • State pension
- • Unemployment benefits (Universal Credit, JSA)
- • Maternity and paternity pay
- • Bereavement benefits
- • Employment and Support Allowance
Your NI Record
- • State pension entitlement (need 35 years for full pension)
- • Contribution-based JSA entitlement
- • Maternity Allowance eligibility
- • Additional State Pension (for pre-2016 contributions)
Important: NI vs Income Tax
While both are deducted from your salary, National Insurance and income tax are fundamentally different:
- • Only on earned income (salary, self-employment)
- • Builds entitlement to state benefits
- • Calculated per pay period
- • Lower rate above £50,270
- • No deduction from pension income
- • On all income types (salary, pensions, investments)
- • General taxation (no specific benefit link)
- • Calculated annually (cumulative)
- • Higher rate above £50,270
- • Applies to pension income
Employee National Insurance (Class 1)
As an employee, you pay Class 1 National Insurance on your earnings. Unlike income tax (which is calculated on an annual basis), NI is calculated on each pay period - this means the calculation is done fresh each month or week with no carry-over.
Important: Lower Earnings Limit (LEL)
There's a Lower Earnings Limit of £6,552 per year (£546.00 per month). If you earn between the LEL and Primary Threshold (£6,552-£12,570), you don't pay any NI, but you still get "credited" with NI contributions. This means these earnings count towards your state pension even though you're not paying anything.
Example 1: £35,000 Annual Salary (£2,916.67/month)
Example 2: £75,000 Annual Salary (£6,250/month)
Employer National Insurance
Employers also pay National Insurance on their employees' earnings. This is Class 1 Secondary NI (also called "Employer's NI"). While this doesn't affect your take-home pay directly, it's important to understand as it represents a significant cost to your employer and affects the total cost of employing you.
Rate and Threshold
Key Points
- • Applies to all earnings above £5,000
- • No upper limit (unlike employee NI)
- • Rate remains at 15% on all earnings
- • Paid by employer on top of your salary
- • Doesn't appear on your payslip
- • Small employers get £5,000 annual allowance
Example: Total Employment Cost
For a £50,000 salary, here's what your employer actually pays:
This is why salary sacrifice can be beneficial - it reduces both employee and employer NI, creating savings that can be shared between you and your employer.
Why Does NI Drop to 2% Above £50,270?
You might wonder why National Insurance drops from 8% to 2% once you earn above £50,270 (the Upper Earnings Limit). This seems counterintuitive - shouldn't higher earners pay more, not less?
The Upper Earnings Limit historically aligned with the Additional State Pension (also called SERPS, then S2P). Benefits from the Additional State Pension stopped accruing above this limit, so the NI rate was reduced.
Although the Additional State Pension was replaced by the new State Pension in 2016 (which has no upper limit), the 2% rate was retained. This is partly for tax policy reasons - when combined with income tax, it maintains a reasonable marginal rate.
- • Below £50,270: 20% income tax + 8% NI = 28% marginal rate
- • Above £50,270: 40% income tax + 2% NI = 42% marginal rate
- • If NI stayed at 8%: 40% + 8% = 48% marginal rate (deemed too high)
What This Means for You
The 2% rate continues for all earnings above £50,270, even if you earn millions. This means NI becomes progressively less significant as a percentage of your total income the more you earn.
Building Your NI Record for State Pension
One of the most important aspects of National Insurance is that it builds your entitlement to the state pension. You need qualifying years to get the state pension, and paying NI is the main way to get these.
You need at least 10 qualifying years to get any state pension at all
You need 35 qualifying years to get the full state pension (currently £221.20/week)
What counts as a qualifying year?
- • Earning above £6,552 as an employee (even if you don't pay NI)
- • Paying self-employed NI (Class 2)
- • Receiving NI credits (e.g., when claiming benefits, on maternity leave, caring for children)
- • Making voluntary NI contributions (Class 3)
Check Your NI Record
You can check your NI record online at gov.uk to see:
- • How many qualifying years you have
- • Gaps in your record
- • Your state pension forecast
- • Whether you can make voluntary contributions to fill gaps
It's particularly important to check if you've had periods of low earnings, time abroad, or career breaks, as you may be able to fill gaps by making voluntary contributions.
Special Cases and Exceptions
If you have more than one job, each job is assessed separately for NI purposes. This means you get the primary threshold for each job, which can result in paying less NI than if you earned the same amount in a single job.
NI = (£30,000 - £12,570) × 8% = £1,394.40
Job 1: (£15,000 - £12,570) × 8% = £194.40
Job 2: (£15,000 - £12,570) × 8% = £194.40
Total: £388.80 (£1,005.60 less!)
Company directors have the option to calculate their NI on an annual basis rather than per pay period. This can be beneficial if you pay yourself irregularly or have a large end-of-year bonus, as it ensures you get the full annual threshold rather than multiple monthly thresholds.
Once you reach state pension age, you stop paying employee National Insurance completely, even if you continue working. However, your employer still pays employer NI on your earnings.
Currently 66 for both men and women, rising to 67 between 2026-2028, and planned to rise to 68 between 2044-2046.
Salary sacrifice schemes (like pension contributions, cycle to work, or electric car schemes) reduce your gross salary for NI purposes. This means you save both employee and employer NI on the sacrificed amount, making these schemes very tax-efficient. The employer NI saving is often shared with the employee as an additional benefit.
Calculate Your National Insurance
Use our free salary calculator to see exactly how much National Insurance you'll pay on your salary for 2025-2026, along with income tax, student loans, and pension deductions.
Calculate Your Take-Home PayFrequently Asked Questions
No. National Insurance only applies to earned income from employment or self-employment. Once you retire and start drawing a pension, you don't pay any National Insurance on that income, regardless of how much you receive. You will still pay income tax on pension income above your personal allowance.
Yes. If you've overpaid (for example, because you had multiple jobs and exceeded the annual maximum), you can claim a refund from HMRC. Refunds for the current tax year are usually processed automatically, but for previous years, you need to contact HMRC directly.
- Class 1: Paid by employees and employers through PAYE (covered in this guide)
- Class 2: Fixed weekly amount (£3.45) paid by self-employed earning over £6,725
- Class 3: Voluntary contributions (£17.45/week) to fill gaps in your NI record
- Class 4: Paid by self-employed on profits between £12,570-£50,270 (9%) and above £50,270 (2%)
Yes. Bonuses are treated as regular earnings for National Insurance purposes and are added to your salary in the pay period you receive them. They're subject to NI at the standard rates (8% or 2% depending on your total earnings). Because NI is calculated per pay period, a large bonus in one month might push you over the upper earnings limit for that month.
UK National Insurance continues unchanged after Brexit. However, if you work in the EU, the reciprocal social security arrangements have changed. You may now need to pay social security contributions in the country where you work, though some agreements remain in place. Check the specific rules for the country where you're working.