National Insurance is the deduction most people notice on a payslip but few can explain. It isn't the same as Income Tax, it works on different thresholds, and the rules change depending on whether you're employed, self-employed, or running your own limited company.
This guide cuts through it. We'll cover the classes of National Insurance (NIC), the 2025/26 thresholds, the rates that apply, and exactly what an employee and a self-employed person pay on real numbers. By the end you'll know which class applies to you and roughly what's coming out of your earnings.
It's written for employees, sole traders and company directors in England, Wales and Northern Ireland. Scotland sets its own Income Tax bands, but National Insurance is UK-wide, so the figures here apply across the board.
<h2 id="what-is-national-insurance">What is National Insurance and why do you pay it?</h2>
National Insurance is a contribution you make on your earnings or profits once they pass a certain level. You pay it to build up entitlement to certain benefits and, most importantly for most people, the State Pension.
Your contributions are recorded against your National Insurance number, so they stay linked to you for life. A year counts as a "qualifying year" towards your State Pension if you've paid or been credited with enough contributions in it.
The headline point that catches people out: National Insurance and Income Tax are separate systems. They use different thresholds, different rates, and in some cases different definitions of income. You can be paying one and not the other.
<h2 id="national-insurance-classes">What are the National Insurance classes?</h2>
National Insurance comes in classes. The class you pay depends on your employment status and how much you earn or make in profit.
| Class | Who pays it | What it's for |
|---|---|---|
| Class 1 | Employees (deducted from pay) | Counts towards State Pension and contributory benefits |
| Class 1A | Employers, on most taxable benefits in kind | Employer contribution; no benefit entitlement for the employee |
| Class 1B | Employers, on PAYE Settlement Agreements | Employer contribution |
| Class 2 | Self-employed (handled through Self Assessment) | Protects your State Pension record |
| Class 3 | Voluntary, to fill gaps in your record | Tops up qualifying years for State Pension |
| Class 4 | Self-employed, on profits above a threshold | A profit-based contribution; does not on its own build extra entitlement |
For most readers, the two that matter are Class 1 (if you're employed) and Class 4 (if you're self-employed). Employers also pay a separate Class 1 secondary contribution on top of what they deduct from staff, which we'll touch on below.
<h2 id="thresholds-2025-26">What are the National Insurance thresholds for 2025/26?</h2>
Here are the key figures for the 2025/26 tax year. These are the numbers that decide when you start paying and at what rate.
Class 1 (employees)
| Threshold | Weekly | Monthly | Annual |
|---|---|---|---|
| Lower Earnings Limit (LEL) | £125 | £542 | £6,500 |
| Primary Threshold (PT) | £242 | £1,048 | £12,570 |
| Upper Earnings Limit (UEL) | £967 | £4,189 | £50,270 |
As an employee you pay nothing below the Primary Threshold of £12,570 a year. You pay 8% on earnings between the Primary Threshold and the Upper Earnings Limit (£50,270), and 2% on anything above that, for 2025/26.
The Lower Earnings Limit matters even though you pay nothing at it. If you earn at or above the LEL, the year still counts towards your State Pension record, even though no contributions are deducted between the LEL and the Primary Threshold.
Class 1 (employers)
Your employer also pays a secondary contribution. For 2025/26 the employer rate is 15% on earnings above the Secondary Threshold of £5,000 a year (£96 a week, £417 a month). That cost falls on the business, not on you, but it's a big factor in how directors structure their own pay.
Class 2 and Class 4 (self-employed)
| Item | 2025/26 figure |
|---|---|
| Small Profits Threshold (SPT) | £6,845 |
| Class 4 Lower Profits Limit (LPL) | £12,570 |
| Class 4 Upper Profits Limit (UPL) | £50,270 |
| Class 4 main rate (LPL to UPL) | 6% |
| Class 4 additional rate (above UPL) | 2% |
| Class 2 voluntary rate (profits below SPT) | £3.50 per week |
Class 2 changed from 6 April 2024. It's no longer charged as a flat weekly amount once your profits reach the Small Profits Threshold. Instead, if your profits are at or above the SPT (£6,845 for 2025/26), Class 2 is treated as paid, so your State Pension record is protected at no cost. If your profits are below the SPT, you can still pay Class 2 voluntarily at £3.50 a week to keep the year qualifying.
<h2 id="employee-nic">How much National Insurance does an employee pay?</h2>
The mechanics are simple once you know the thresholds. You pay 8% on the slice of annual earnings between £12,570 and £50,270, then 2% on anything above £50,270, for 2025/26.
Illustrative example. Sam is employed on a salary of £35,000 for 2025/26.
- Earnings above the Primary Threshold: £35,000 - £12,570 = £22,430.
- All of that sits below the Upper Earnings Limit, so it's charged at 8%.
- Class 1 NIC: £22,430 × 8% = £1,794.40 for the year.
Illustrative example. Alex is employed on £60,000 for 2025/26, so part of their pay crosses the Upper Earnings Limit.
- On earnings from £12,570 to £50,270 (a band of £37,700): £37,700 × 8% = £3,016.
- On earnings above £50,270 (£60,000 - £50,270 = £9,730): £9,730 × 2% = £194.60.
- Total Class 1 NIC: £3,016 + £194.60 = £3,210.60 for the year.
Notice the rate drops to 2% above the Upper Earnings Limit. National Insurance is one of the few parts of the system where the marginal rate falls as you earn more, which is the opposite of Income Tax.
If you want to see this alongside Income Tax for your own salary, our take-home pay tools break a payslip down line by line, and the National Insurance calculator isolates the NIC figure on its own.
<h2 id="self-employed-nic">How much National Insurance do the self-employed pay?</h2>
If you're a sole trader, you pay Class 4 on your taxable profits and, in most cases, get Class 2 treated as paid for free. Class 4 runs on the same band shape as employee NIC but at a lower main rate.
You pay 6% on profits between the Lower Profits Limit (£12,570) and the Upper Profits Limit (£50,270), then 2% on profits above that, for 2025/26.
Illustrative example. Jordan is a self-employed designer with taxable profits of £35,000 for 2025/26.
- Profits above the Lower Profits Limit: £35,000 - £12,570 = £22,430.
- All within the Class 4 main band, charged at 6%: £22,430 × 6% = £1,345.80 for the year.
- Profits are above the Small Profits Threshold of £6,845, so Class 2 is treated as paid. Nothing extra to pay there.
Compare that with Sam the employee on the same £35,000. Sam pays £1,794.40 in Class 1; Jordan pays £1,345.80 in Class 4 on the same headline figure. The self-employed main rate is 6% against the employee's 8%, which is why the numbers differ.
Self-employed National Insurance is collected through your tax return, alongside your Income Tax. If filing it feels like a chore, our Self Assessment service handles the whole return, and our guide for sole traders covers what else you need to keep on top of.
<h2 id="directors-and-dividends">What about company directors and dividends?</h2>
If you run a limited company, the picture changes. A director who takes a salary pays Class 1 employee NIC like anyone else, and the company pays employer NIC on top.
Dividends are different. Dividends are not earnings, so no National Insurance is due on them at all. That's a key reason many directors take a modest salary plus dividends rather than a large salary. It's also why getting the salary level right matters: too low and you risk losing a qualifying year, too high and you trigger more NIC than you need to.
This is a planning decision rather than a one-size-fits-all rule, and the right split depends on your wider income. Our guide for limited companies walks through the trade-offs, and clean records make the call far easier, which is where bookkeeping earns its keep.
<h2 id="nic-vs-income-tax">How does National Insurance differ from Income Tax?</h2>
It's worth being clear on the differences, because people often assume the two work the same way. They don't.
| Feature | National Insurance (employee/self-employed) | Income Tax |
|---|---|---|
| Starting point (2025/26) | £12,570 of earnings or profits | £12,570 personal allowance |
| Main rate | 8% (employee) or 6% (self-employed) | 20% basic rate |
| Top marginal rate behaviour | Falls to 2% above the upper limit | Rises to 40% then 45% |
| Applies to dividends? | No | Yes |
| Builds State Pension entitlement? | Yes | No |
The starting thresholds happen to line up at £12,570 for 2025/26, but that's where the similarity ends. National Insurance has no equivalent of the higher and additional rates, and it ignores dividends entirely.
Key takeaways
Book a free Tax Health Check →
- National Insurance is separate from Income Tax and builds your State Pension entitlement.
- Employees pay Class 1 at 8% between £12,570 and £50,270, then 2% above, for 2025/26.
- The self-employed pay Class 4 at 6% on the same band shape, with Class 2 treated as paid once profits reach £6,845.
- Dividends carry no National Insurance, which is why director pay structure matters.
<h2 id="faqs">Frequently asked questions</h2>
Do I pay National Insurance and Income Tax separately?
Yes. They're two different systems with their own rules. For 2025/26 they happen to start at the same £12,570 figure, but the rates and the way they treat income differ, and you can be liable for one without the other.
When do I stop paying National Insurance?
You stop paying National Insurance on earnings once you reach State Pension age. If you're self-employed, Class 4 stops from 6 April after you reach State Pension age. You may still owe Income Tax after that point.
Do I pay National Insurance on dividends?
No. Dividends are not earnings, so no National Insurance is due on them. They do attract dividend tax once you go over the dividend allowance, but that's a separate charge under the Income Tax system.
What is the Small Profits Threshold?
It's the profit level at which a self-employed person's Class 2 National Insurance is treated as paid for free. For 2025/26 it's £6,845. If your profits are below it, you can choose to pay Class 2 voluntarily at £3.50 a week to keep the year counting towards your State Pension.
Why does the National Insurance rate drop above the upper limit?
Once your earnings pass the Upper Earnings Limit (£50,270 for 2025/26), the employee rate falls from 8% to 2%, and the self-employed Class 4 rate falls from 6% to 2%. It's a deliberate feature of how National Insurance is structured, unlike Income Tax where the rate rises as you earn more.
Want help getting your National Insurance right?
Whether you're an employee checking a payslip, a sole trader working out your bill, or a director deciding on salary versus dividends, the figures need to be right. Book a free 20-minute call with a Zmartly accountant and we'll walk you through exactly what you owe and how to keep it efficient. Talk to a Zmartly accountant.
