You think you have your head around taxes and then there's National Insurance, yet another piece of the puzzle!
This is the life of a business owner in the UK where the tax system is one of a multitude of important rules, discovering more regulations, whilst also trying to make maximum use of available allowances, reliefs, and breaks. It can be quite the head scratcher and one of those essentials is Employers' National Insurance Contributions (NICs).
If you employ staff then NICs is non-negotiable, and a core part of payroll given it's also a major contributor to government revenue, accounting for roughly one-sixth of all tax collected.
This post will guide you through how NICs works, your responsibilities as an employer, and a few ways you may be able to reduce your tax bill. Be sure to read on to find out more:
National Insurance (NI) forms part of the UK tax system and it was first introduced in 1911, and then expanded in 1948, to fund state benefits including:
People's eligibility for some benefits such as the state pension can depend on the NICs they've made during their working life. If you have employees over the age of 16 and you're paying them above a certain amount, you owe NICs on their earnings. That’s in addition to what your employees pay themselves which is based on a portion of their salaries.
The contributions are taken through the Pay As You Earn (PAYE) system meaning the deductions happen before payday through your payroll when it's processed. NICs is in effect a tax on employing people and it forms a significant amount of what HMRC collects in tax every year.
Example: Say you open a cafe and hire 2 baristas, you'd then become aware through your payroll that you're liable for Employer NICs every month at £270. If you then multiply that by 12 you can then see how the cost of employing people adds up over time.
You'll pay Class 1 Secondary National Insurance Contributions (NICs) on your employees’ earnings above the Secondary Threshold (ST). That's currently £417 per month in the 2025/26 tax year. Once their gross pay exceeds that threshold, you have to pay a percentage of those earnings.
The calculation is actually one of the simpler parts of the UK tax system:
Employer NICs = (Your employee’s gross pay − the Secondary Threshold) × Applicable rate
Most employers pay a flat 15% above the threshold. But not all employees are treated equally.
Each of your employees will have a letter code, and that's their NI category. Their category is a reflection of their circumstances and the common ones are covered in the table below.
Specialist categories also exist with reduced rates for eligible workers in Freeports, Investment Zones, and maritime industries. The most common NI categories include:
| Category | Who it applies to | Important employer notes |
| A | Most employees 21 years old and over in the PAYE system | 15% On earnings above the Secondary Threshold of £417 per month. |
| H | Apprentices under age 25 | 0% On earnings up to the Upper Secondary Threshold of £4,189 per month and 15% above that. |
| M | Employees under age 21 | 0% On earnings up to £4,189 per month, then 15% rate above that. |
Thresholds and rates can change each year and vary by NI category.
Example: James runs a plumbing business and takes on his first employee as an apprentice. Because his apprentice earns £3,500 per month, James pays no NICs for them under Category H! This then provides him with a saving of over £600 per month, or £7,200 a year, compared to taking on a standard employee.
There are 2 main factors:
1. Your employee's NI category
2. How much of their pay falls within each band
| Thresholds and rates relevant to employers 2025/26 | ||||
| Threshold | Weekly | Monthly | Annual | Notes |
| Secondary Threshold (ST) | £96 | £417 | £5,000 | As an employer you commence paying NICs on earnings above this level at 15%. |
| Primary Threshold (PT) for employees | £242 | £1,048 | £12,570 | Your employees start paying NIC above the level but not you as an employer. |
| Upper Earnings Limit (UEL) | £967 | £4,189 | £50,270 | Above this level, employee NICs drops to a lower rate, but employer NICs remains at 15%. |
| Upper Secondary Threshold (UST) | £967 | £4,189 | £50,270 | Employer NIC is 0% on earnings up to this level for the under 21's, apprentices aged under 25, and qualifying veterans. |
For the most part you'll pay 15% on any part of your employee's pay that's above £417 per month. If your employee is under 21 or an apprentice under 25, you’ll pay nothing on their earnings up to £4,189 per month — then 15% above that.
In general, that’s how NI works, allocate the correct category, apply the relevant thresholds, and then do the calculation.
Example: Jane runs an animation studio and gives one of her apprentice animators (aged 24) a pay rise from £3,750 to £4,250 per month. The additional £500 a month (equivalent to £6,000 per year) pushes their pay above the UST meaning Jane has to pay 15% NICs on the excess. This is why it's essential to plan these increases carefully in advance through a business budget, so as to help you forecast the additional costs.
The Employment Allowance enables you to reduce your NI bill by up to £10,500 per year should you qualify. It's potentially good news if you qualify and the criteria includes:
Of note it's not automatic, you need to claim it every tax year, usually through your payroll software. If you're a director in a company and you're taking a salary then you should consider advice to ascertain the most tax efficient means of paying yourself that takes into account:
If you're giving employees perks (cars, gym memberships, or private healthcare for example) these may count as Benefits in Kind (BIKs). It means you incur more NICs. BIK is enforced if your staff benefit from those perks personally and there isn't a clear or identifiable business purpose. It exists to prevent employers replacing salaries with gifts.
Where there are BIK gifts then both the employees personal tax and their NI is applied along with Employers' NICs (usually Class 1A or Class 1B). You may also have to pay tax on them too. You have to document this in 1 of 2 ways, either:
Critical to this is having clear records of expenses that detail what the benefits were and when exactly they were purchased.
Of note from April 2027 with some limited exceptions, you will have to report tax and most benefits and expenses in real-time through your PAYE payroll submissions. This means all the relevant tax will be deducted from your employee's pay in each pay period thereby reducing the need for tax code adjustments and collecting tax on benefits at the end of the year.
Example: Bav provides his sales manager with a company car but doesn't realise he needs to report this. Then, 9 months later he receives a letter from HMRC requesting a visit to conduct a PAYE audit. Their checks reveal the benefit resulting in a Class 1A NICs liability plus a penalty for not reporting it!
Here are some top tips to ensure you don't fall foul of NICs:
1. Automate - use payroll software that stays up to date with NIC changes and thresholds.
2. Keep informed - subscribe to updates from HMRC and put reminders in your calendar to check on new rates and rules.
3. Understand the impact of changes - for changes to rates or thresholds, use budgets and cashflow forecasts to ascertain the full impact and if you need to make savings, hike prices, increase sales, or a combination of all the above.
4. Explore tax efficient benefits - are you making use of the Employment Allowance, if applicable? Have you looked into offering benefits to your staff that are exempt from NICS? Think:
5. Manage your workforce needs - if you understand the impact of any changes, per point 3, you may then explore alternative options if you're fearful of breaking your business budget. Can you:
6. Obtain professional advice - consult your accountant or tax advisor to ensure you're compliant, and not missing out on any potential savings!
1. Incorrect employee classification - check the ages of your employees carefully, it's easy to miss a birthday, so make sure they're still under 21 or under 25 as an apprentice to benefit from reduced NICs.
2. Overlooking pay elements - NI calculations must take into account all forms of pay and benefits, such as overtime, bonuses, and specific benefits-in-kind such as company cars or accommodation (see our blog post on this for a full list). Overlooking these kinds of elements when determining NI contributions is a frequent error, risking potential underpayment and therefore penalties.
Of note, be sure to include any annual bonuses or commissions your employees earn as part of calculations of their NI contributions for the timeframe in which the payment is made.
3. Late or incomplete reporting - you're required to report relevant payroll information which includes NICs to HMRC in real-time. So, whenever your members of staff are paid, you have to complete a Full Payment Submission (FPS) to HMRC.
Do so late, incomplete, or incorrect then you'll likely face penalties and complications reconciling your NI payments. Instead use payroll software that can set up a clear schedule to automatically submit FPS.
4. Not adjusting for employee contributions - you need to adjust employee contributions for NI should their circumstances change. Has your employee moved into a higher earnings bracket? Have you checked? Reasons for this range from a change in employment status, a salary increase, or participation in a salary sacrifice scheme.
5. Miscalculating the earnings thresholds - earnings thresholds can be subject to change from one tax year to the next. Employees start paying NI at the primary threshold and employers start paying at the secondary threshold. If you misallocate and miscalculate then there will be incorrect deductions.
6. Errors related to Salary Sacrifice Schemes - salary sacrifice means your employees can exchange part of their salary for various benefits. Doing so can reduce both employees' and employers' NICs. We find clients can forget to apply these adjustments to employee's gross salary or miscalculate the salary sacrifice impact on NI calculations. Make sure your payroll system is updated and accurately reflects any adjustments.
7. Forgetting NI for off-payroll workers - if you use contractors who operate through a limited company you need to conduct a careful assessment as to whether they may actually be employees from a tax perspective. Known as IR35 rules, if a contractor falls within them then you're responsible for deducting NI contributions.
Don't fail to apply NI where contractors are subject to IR35. Be sure therefore to regularly assess the status of your off-payroll workers regarding IR35. You can find out more in the link.
Employers' NICs is a tax obligation that like all things taxation, you don't want to get wrong. It therefore pays to invest in good payroll software, proactive planning, and professional advice to ensure you're getting your responsibilities right.
The content of this post was created on 04/11/2025.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
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