The Small Business Guide to National Insurance

When you first start handling payroll, correctly calculating and processing deductions is often the biggest challenge. This is especially true for any new business that doesn’t start bang on April 6^th (the start of a new tax year) or when you hire someone new. They’re going to be with you for a partial year, and this can make calculations tricky.

National Insurance is a key deduction, and as there are multiple different classes of National Insurance it can be confusing. So how do you determine the class of National Insurance for your team, how do you calculate it, and what do you need to take into account? As seasoned tax accountants, we think we can help.

National Insurance Payments by Class

There are four different classes of National Insurance. For the most part as an employer your team will be dealing with Class 1, though under certain circumstances they may want to make Class 3 contributions in addition. Your own National Insurance may be Class 2 or Class 4.

Let’s break this down by category.

National Insurance Class 1: Employees

At the time of writing, National Insurance contributions (NICs) are only paid for employees earning £242 per week and upward. (Employees earning between £125 and £241 per week still qualify for national insurance credits.)

From £242 to £967 employees will pay an 8% rate for National Insurance. An additional 2% is taken from all further earnings. For example, if you have a member of staff paid £1000 per week, their total NICs for the week would be £78.02 – £77.36 for the first £967 and £0.066 for the remaining £33.

NICs are not calculated on a flat rate. Employees paid a flat salary with no commission or overtime will pay the same amount week to week, anyone whose hours vary or who receives payment through commission, overtime, etc., will be contributing different amounts each pay cycle.

If any of your employees have reached State Pension age, they no longer pay NICs at any level.

National Insurance Classes 2 and 4: The Self-Employed

Both Class 2 and Class 4 National Insurance are allocated to the self-employed. The difference depends on your total profit, so this calculation is made annually.

If your total annual profit is £12,570 or lower, you’re in Class 2. Between £6845 and the top of Class 2, your contributions are treated as having been paid, but as soon as your profit hits £12571, you will enter Class 4.

If your total annual profit is £6844 or lower, NICs are voluntary – a payment of £3.50 per week – but if not paid, you will not be marked as having made contributions. This may mean reduced eligibility for state pension and other National Insurance run systems later in life.

All profits above the Class 4 threshold are subject to deductions. Between £12570 and £50270, contributions are made at 6%. For further profit, contributions are made at 2%.

So if your annual profit is £60,000, you’ll pay nothing on the first £12570, then £2262 up to £50270 and £194.60 on the remainder, for a total of £2456.60.

National Insurance Class 3: Voluntary Contributions

Class 3 NICs are purely voluntary and are designed to help people to qualify for state pension benefits. You will need 35 years of NICs or credits to qualify for the full state pension, but start to received at least some if you have at least ten years worth.

There are a number of rules and guidelines covering Class 3 contributions, but they are essentially very flexible. You or your employees may wish to take advantage of Class 3 contributions, depending on the specific situation, but we would always recommend involving an accountant in these discussions in order to go about this process in the most effective way.

If you have any other questions or if you’d rather outsource your payroll so experts can handle these calculations for you, please get in touch and we’ll be happy to help.