What National Insurance do I pay as an employee?
Most employees pay National Insurance contributions (NIC) before they get their wages. In this section we explain NIC issues that you might come across as an employee.
If you are self-employed, we suggest you look at ‘what National Insurance do I pay if I am self-employed?’ and ‘how do I register for tax and National Insurance?’.
If you are an employee, you pay Class 1 NIC on your earnings from employment, such as, salaries and bonuses. The amount you pay depends on how much you earn in a particular pay period.
How much NIC do I pay?
There is a threshold (called the primary threshold) and if, as an employee, your income falls below this you do not need to pay any contributions. For 2017/18 this threshold is £157 a week or £681 a month.
The actual amount of Class 1 NIC you pay depends on what you earn up to the upper earnings limit, which is £866 per week or £3,753 per month for 2017/18.
For 2017/18 the weekly rates of Class 1 NIC for employees are as follows:
|On first £157||Nil|
|On income between £157 and £866||12%|
|On amount above £866||2%|
For 2017/18 the monthly rates of Class 1 NIC for employees are as follows:
|On first £681||Nil|
|On income between £681 and £3,753||12%|
|On amount above £3,753||2%|
Class 1 NIC is generally calculated week by week or month by month, depending on whether your employer pays you weekly or monthly. It is not cumulative like income tax deducted under Pay As You Earn (PAYE).
Look at example Karim to see how to work out your NIC.
Employer National Insurance contributions
Your employer pays Class 1 NIC on your earnings too.
You may also come across Class 1A and Class 1B NIC. You will not pay these contributions as an employee, but you might hear them mentioned, so it is as well to know what they are:
- Class 1A NIC is paid by your employer if they provide you with certain benefits in kind, for example, a car for private use. The employer pays the NIC on the value of the benefit in kind.
- Class 1B NIC is paid by your employer if they enter into a special arrangement with HMRC called a 'PAYE settlement agreement'. This is where your employer pays your income tax due on certain benefits in kind and expenses payments.
If you have earnings above the lower earnings limit (£113 per week or £490 per month for 2017/18) and below the primary threshold (£157 per week or £681 per month for 2017/18) you will not have to pay any Class 1 NIC. Your NIC record will be credited, however, as though you have paid Class 1 NIC. These are called NIC credits. These may earn you entitlement to contributory benefits and the state pension.
If you earn less than the lower earnings limit (£113 a week for 2017/18), you pay no Class 1 NIC and you do not get any NIC credits either.
Unless you are a director of a company, each employment you have is looked at separately for NIC purposes. This means that each job has the full lower threshold, but that you may pay NIC on each job.
If, in the 2017/18 tax year you have two jobs, and expect to pay Class 1 NIC on weekly earnings of at least £866 throughout the whole tax year in one of the jobs, you can ask to defer payment of NIC in the other job. If you are paid monthly, you must expect to pay Class 1 NIC on monthly earnings of at least £3,753 throughout the whole tax year in one of the jobs.
Look at example Anya to see how to work out your NIC if you have more than one job.
If you are both employed and self-employed you need to pay:
- Class 1 NIC on your employed income; and
- Class 2 and Class 4 NIC on your self-employed income.
You will pay your Class 1 NIC each pay day period, but your Class 2 NIC are not collected until 31 January after the end of the tax year. Your Class 4 NIC are paid together with your income tax liabilities in your payments on account and balancing payment.
When you complete your self assessment tax return, HMRC will automatically calculate the amounts of Class 2 NIC and Class 4 NIC, taking into account the overall maximum amounts due. You can read more about NIC in our 'self employment section'.
Loans are not earnings for NIC purposes.
This means you do not have to pay Class 1 NIC on the cash equivalent of the benefit of an interest-free or low-interest loan (a 'beneficial loan') from your employer, although you may have to pay income tax on any benefit.
Your employer may have to pay Class 1A NIC on the taxable benefit, if the loan is a beneficial loan.
If your employer writes off or waives the loan, they will deduct Class 1 NIC from your other wages through the payroll based on the value of the loan that has been written off.
If you later repay a loan on which Class 1 NIC has been charged, then depending on how much you actually repay, the appropriate amount of Class 1 NIC charged should be repayable to you.
An advance of pay, or a sub, is effectively a loan. It is not normally liable to Class 1 NIC at the date of the advance. Instead, your employer should collect the Class 1 NIC due on the advance at the time your pay would have normally been due – your usual pay day.
If you are off work as a result of an injury or accident, and your employer makes you a loan whilst you are waiting for the result of a claim for damages, the loan is treated as earnings for NIC purposes at the date of payment, unless you are obliged to repay it, whatever the outcome of the claim.
Again, if you have paid Class 1 NIC under this rule, and you later repay the loan in whole or in part, a refund of NIC is due to you. If the repayment is in the same year as you paid the NIC, an adjustment will be made in your next pay packet. If not, you will need to claim a refund.
There is information on how to claim a refund of NIC in our section ‘what is National Insurance?’.
In a tax year I earn less than the annual threshold for paying NIC, but I have had to pay some – why?
Sometimes you see the NIC thresholds given in annual amounts, as well as weekly or monthly amounts. However, you pay Class 1 NIC based on the amount you earn in each pay period, whether that is a week or a month. You do not pay Class 1 NIC based on your total earnings for the whole year. It is not cumulative like income tax deducted under Pay As You Earn (PAYE).
For the current tax year the primary threshold is £157 a week or £681 month.
If you earn more than the primary threshold in any particular pay period, weekly or monthly, you pay Class 1 NIC, even if your annual earnings divided by 52 weeks or 12 months is less than the primary threshold. If your earnings fluctuate, you may find that you pay NIC in some pay periods but not in others.
If you are employed part-time and only work a few hours a week, you may deliberately keep your earnings below the lower earnings limit for NIC, so that you do not have to pay any Class 1 NIC. If you are asked to work more hours, you may be worried about the effect on your NIC liability.
You should be aware that NIC can 'buy' benefit and pension entitlement. If you earn less than the lower earnings limit (£113 a week for 2017/18) for Class 1 NIC purposes, you pay no NIC and you are not entitled to contributory benefits.
For state pension purposes, a year only counts as a qualifying year if you pay sufficient contributions for that year. Earnings below the lower earnings limit do not generate a qualifying year. However, you can sometimes get NIC 'credits', for example if you look after a child or disabled person. If you want more information on NIC credits go to the section ‘what is National Insurance?’.
If you have employment earnings above the lower earnings limit (£113 per week for 2017/18), you fall within the NIC system and can get NIC credits. However, you do not actually have to pay any Class 1 NIC until your earnings reach the earnings threshold (primary threshold) (£157 per week for 2017/18).
This means that for earnings between the lower earnings limit and the earnings threshold (over £113 but not more than £157 per week for 2017/18), you enjoy the benefits of the NIC system without the costs. You pay NIC at an effective nil rate, but this can 'buy' entitlement to contributory benefits and the state pension.
Therefore, if it is possible for you to work additional hours to bring earnings between the lower earnings limit and primary threshold, this will be beneficial and will give you the benefits of the NIC system for no extra cost.
Note, however, that a change in your earnings and/or working hours can also affect your entitlement to tax credits, universal credit or certain state benefits so it is worth considering the overall picture. You might need to take advice.
Look at the example Lucy to see how this works.
Are salary sacrifice arrangements always a good idea for low earners?
Salary sacrifice is not always a good idea for low earners, and there is one particularly unfavourable situation set out below to be aware of. You cannot participate in salary sacrifice schemes where your pay would be reduced below the national minimum or living wage.
Nevertheless, salary sacrifice can benefit you in some circumstances. From 6 April 2017 there are fewer opportunities to benefit from such an arrangement. Below we explain how such arrangements work, what items may be included in any arrangements from 6 April 2017 and the changes that will be made to any arrangements that were already in place at 5 April 2017.
How do these arrangements work?
Your employer may offer a salary sacrifice scheme that enables you to swap cash salary for non-cash benefits. The idea is that you can save tax and NIC and be in a better position overall than if you merely purchased the benefit from your net salary independently.
This can be particularly efficient where the benefit is exempt from tax and NIC.
Even if the benefit provided in exchange for the cash salary is not exempt from tax and NIC, you normally save NIC. You pay Class 1 NIC on your normal cash salary; on most benefits you do not pay any Class 1 NIC, although your employer pays Class 1A NIC. So you save your Class 1 NIC liability.
Although this sounds attractive, if you are a low earner, the advantages are limited. If you normally earn employment income between the lower earnings limit and the earnings threshold, you do not pay Class 1 NIC anyway, so switching from cash to benefit will not save Class 1 NIC for you.
If the salary sacrifice reduces your earnings below the lower earnings limit, this is even more dangerous. If this happens, you do not pay Class 1 NIC, but you also do not receive NIC credits. This means that you lose entitlement to contributory benefits and the state pension, if you do not receive NIC credits in another way. This is a particular worry if your pre-sacrifice salary was between the lower earnings limit and the earnings threshold, where you would have been entitled to NIC credits.
Look at the example Kerry to see how salary sacrifice works.
Salary sacrifice from 6 April 2017
New arrangements entered into from 6 April 2017 will only be tax-efficient for the following benefits:
- Employer provided pensions (and the costs of certain associated guidance);
- Childcare (subject to certain limits);
- Cycle to work scheme; and
- Ultra-low emission cars.
Arrangements entered into before 6 April 2017
Any tax and NIC savings will be maintained on all existing arrangements until 5 April 2018. Arrangements relating to cars, accommodation and school fees will remain protected until April 2021. This means that where you have an existing salary sacrifice arrangement, it may cease to be effective from 6 April 2018.
You normally pay Class 1 NIC, if you are an employee, from age 16 until you reach state pension age. You can work out your state pension age using the calculator on the GOV.UK website.
Even if you continue to work as an employee after you have reached state pension age, you do not have to pay Class 1 NIC. You only have to pay them on any earnings that were due to be paid to you before you reached state pension age.
You can find more information on NIC after state pension age in the ‘pensioners section’ of this website.
Karim earns £13,364 per year, that is, £257 a week, in his part-time job as a milkman. Each week he pays Class 1 NIC of:
|£257 - £157 = £100 @ 12%||12.00|
Emily works for a single employer, but her earnings fluctuate each month depending on how much overtime she works.
Her employer deducts Class 1 NIC each month from her earnings, using the employee rates and thresholds for 2017/18. The monthly primary threshold is £681.
|Take off April Primary Theshold||(681)|
|Pay subject to Class 1 NIC||£100|
|(Class 1 NIC at 12% is £12)|
|Take off May Primary Threshold||(681)|
|Pay subject to Class 1 NIC||£100|
|(Class 1 NIC at 12% is £12)|
|Take off June Primary Threshold||(681)|
|Pay subject to Class 1 NIC||£300|
|(Class 1 NIC at 12% is £36)|
|Take off July Primary Threshold||(681)|
|Pay subject to Class 1 NIC||£0|
|And so it goes on throughout the year|
Anya has two jobs. How much Class 1 NIC will she pay each week in 2017/18?
Anya earns £177 a week from her job in a chemist's and a further £75 a week as a part time dental assistant.
She will pay no NIC on the wages she gets from the dentist, but she will have to pay NIC on the chemist wages.
Each week she will pay £2.40, that is, £177 less the primary threshold of £157 at the rate of 12%. This works out as £20 per week at 12%.
Anya’s employer, the chemist, will take this Class 1 NIC from her wages, together with any income tax due, before paying Anya.
Ali earns £5,500 per year, but the job is seasonal, so she works a lot at Christmas and on other bank holidays.
During Christmas and Easter week in the 2017/18 tax year, she earns £650, but most other weeks her wages are £100 per week.
Ali pays NIC on her earnings of £650 in Christmas and Easter week, as in these weeks her earnings exceed the primary threshold.
She does not pay Class 1 NIC on her earnings in the weeks when she earns only £100 per week, as this is less than the primary threshold.
Lucy currently earns £90 per week from her part-time job. She pays no tax or Class 1 NIC. Her employer offers her some additional hours. If she accepts the additional hours she will earn £115 per week. She is worried that she will have to pay Class 1 NIC and the additional work will not be worthwhile.
At present Lucy's earnings are below the lower earnings limit for Class 1 NIC. This means that she is not entitled to contributory benefits and is not accruing qualifying years for state pension purposes.
By increasing her hours, Lucy's earnings will rise above the lower earnings limit (£113 per week) for Class 1 NIC purposes. However, as her earnings are below the primary threshold of £157 per week, she does not actually pay Class 1 NIC; instead she is credited with NIC.
This means she could gain entitlement to contributory benefits and potentially a qualifying year for state pension purposes, without having to physically pay out anything in terms of Class 1 NIC. She is also not earning enough to pay any tax, so she will be able to keep the whole of her £115 per week, although it may affect any state benefits she currently receives.
However, if her earnings increase above the primary threshold (£157 per week in 2017/18), she will have to start paying Class 1 NIC at 12% on the excess over £157 per week. She may have to pay income tax too, depending on her tax code.
Kerry earns £167 per week. She pays for a child to attend nursery. Her employer suggests a salary sacrifice scheme whereby she gives up cash salary in exchange for her child attending a workplace nursery provided by her employer, as this will save her tax and NIC on nursery costs. The amount sacrificed is to be £55 a week.
At present, she pays Class 1 NIC at the standard rate of 12% on earnings above £157 per week for 2017/18. This equates to contributions of £1.20 per week.
If she exchanges £55 of cash salary for £55 of workplace nursery provision each week, she will have cash earnings of only £112 per week. This will take her earnings below the lower earnings limit and outside the NIC system. This could adversely affect Kerry’s entitlement to contributory benefits, statutory maternity pay, statutory sick pay, and statutory adoption pay and also her state pension entitlement. Kerry could be entitled to some NIC credits that might give entitlement to some benefits.
This arrangement would also reduce Kerry's entitlement to tax credits on her childcare costs, because you cannot claim tax credits on childcare costs that are funded by someone else, for example, by your employer. She is therefore likely to lose much more in tax credits than she saves in Class 1 NIC.
Her employer might also be in breach of the national minimum wage rules.
If you want information on how to get a NINO, go to ‘how do I get a National Insurance number?’.
If you want general information on NIC including details of where you can find out more information, go to ‘what is National Insurance?’.