What is National Insurance?
National Insurance (NI) is a tax on earnings that funds state benefits like the State Pension and NHS. Both employees and employers pay it.
Current Rate (2025/26)
Employee: 8% on earnings £12,570-£50,270, 2% above. Employer: 13.8% on earnings above £9,100
Example
Employee earning £40,000 pays ~£2,194 NI. Employer pays additional ~£4,264 on top.
Key Dates
Paid monthly through PAYE
How National Insurance Works in Practice
National Insurance is a tax on employment earnings and self-employment profits that funds the State Pension, certain state benefits, and the NHS. Unlike Income Tax, which is a single deduction, NI involves two separate charges when you employ someone: the employee pays their share, and the employer pays a separate additional contribution on top.
For the 2025/26 tax year, the employee (Class 1) rates are 8% on earnings between £12,570 and £50,270 per year, and 2% on earnings above £50,270. These thresholds are applied weekly or monthly depending on pay frequency. The employer rate changed significantly from April 2025: employers now pay 15% on earnings above £5,000 per year, a notable increase from the previous 13.8% rate on earnings above £9,100.
For company directors, NI is calculated on an annual basis rather than a period-by-period basis. This is called the directors' annual earnings period and it means the annual thresholds apply to the total salary paid during the tax year, regardless of how payments are spread. This is important when planning how much salary to draw.
National Insurance also determines your entitlement to the State Pension. You need 35 qualifying years of NI contributions to get the full new State Pension. Even if you draw a minimal salary, ensuring it is above the Lower Earnings Limit (£6,500 for 2025/26) means you get a qualifying year without necessarily paying any NI. This is a critical consideration for directors who take a low salary combined with dividends.
Step by Step
Employee NI is deducted through PAYE along with Income Tax. Your payroll software calculates the correct amount based on earnings in each pay period and the applicable thresholds. The deducted amount is paid to HMRC as part of your monthly PAYE remittance along with the employer NI.
For directors specifically, most payroll software offers two methods: annual (pro-rata) or alternative (standard). The annual method applies the full annual thresholds to each payment cumulatively, which is the standard method for directors. This prevents overpayment when directors receive irregular payments throughout the year.
Employer NI is an additional cost on top of the gross salary. If you pay an employee £30,000, the employer NI on top of that is approximately £3,750 (15% on the amount above £5,000). This cost is deductible as a business expense for Corporation Tax purposes, but it is an often-forgotten cost when budgeting for staff. The Employment Allowance of up to £10,500 per year can offset this, but it is not available to single-director companies with no other employees.
Practical Tips
- Review the optimal salary level with your accountant each April when NI thresholds change, as the best strategy shifts with threshold and rate adjustments
- If you are the sole director with no other employees, be aware you cannot claim Employment Allowance, which affects the cost of paying yourself a higher salary
- Ensure your salary is at least above the Lower Earnings Limit to protect your State Pension entitlement, even if you keep it low to minimise NI
- Factor in the full employer NI cost when budgeting for hiring, as a £30,000 salary actually costs the company around £33,750 after employer NI
Common Mistakes to Avoid
- Setting a director's salary at £12,570 without considering that earnings above £12,570 trigger employee NI at 8% and employer NI at 15%, which combined may exceed the savings from the personal allowance
- Forgetting that employer NI is a real additional cost to the business on top of gross salary, often 15% more than the headline salary figure
- Not checking whether the Employment Allowance is available to your company, especially single-director companies which do not qualify unless they have at least one other employee
- Drawing salary below the Lower Earnings Limit and missing out on a qualifying year for State Pension without realising it
Frequently Asked Questions
What is the National Insurance rate for employers in 2025/26?
From April 2025, employers pay 15% National Insurance on employee earnings above £5,000 per year. This is an increase from the previous 13.8% rate, and the threshold at which employer NI kicks in has dropped from £9,100 to £5,000. The Employment Allowance has increased to £10,500 to partially offset this.
What is the best salary level to avoid National Insurance?
Many directors set their salary at the Primary Threshold of £12,570 to utilise their Income Tax personal allowance without paying employee NI. However, from April 2025, employer NI starts at £5,000, so a salary above £5,000 does trigger employer NI. A salary of £5,000 avoids all NI but wastes your personal allowance.
Do I pay National Insurance on dividends?
No. Dividends are not subject to National Insurance, which is one of the main reasons directors of limited companies use a low salary plus dividends strategy. Dividends are subject to dividend tax instead, but there is no employer or employee NI charge.
How many years of National Insurance do I need for the State Pension?
You need 35 qualifying years of National Insurance contributions to receive the full new State Pension. You need at least 10 qualifying years to receive anything. Earning above the Lower Earnings Limit (£6,500 in 2025/26) in a tax year counts as a qualifying year even if no NI is actually paid.
Is employer National Insurance tax-deductible?
Yes. Employer National Insurance is an allowable business expense and reduces your taxable profit for Corporation Tax purposes. If you pay £5,000 in employer NI and your Corporation Tax rate is 25%, the effective cost is £3,750 after tax relief.
Source: HMRC NIM01000 - National Insurance Manual: Introduction
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