What Is National Insurance?
National Insurance (NI) is a tax on earnings paid by employees, employers and the self-employed. Introduced in 1911, it was originally designed to fund a contributory insurance scheme for sickness and unemployment benefits. Today it primarily funds the State Pension, Statutory Sick Pay, Statutory Maternity Pay, and certain other state benefits.
NI is administered by HMRC and collected alongside income tax through PAYE for employees, and via Self Assessment for the self-employed. Unlike income tax, NI contributions create a record of "qualifying years" — years in which you contribute sufficiently — that determines your future entitlement to the State Pension and other contributory benefits.
An important distinction: NI is not hypothecated in the strict sense. Contributions go into the National Insurance Fund, which is separate from general taxation, but the government can supplement the fund from general tax revenues when needed. In practice, NI is treated as part of the overall tax burden.
Class 1: Employee NI (2026/27)
Class 1 employee NI is deducted by your employer via PAYE on each pay period. You pay it on all employment income above the Primary Threshold of £12,570 per year (£242 per week).
| Annual Earnings | Weekly Earnings | Rate |
|---|---|---|
| Up to £12,570 | Up to £242 | 0% |
| £12,571–£50,270 | £242.01–£967 | 8% |
| Above £50,270 | Above £967 | 2% |
The threshold of £50,270 is called the Upper Earnings Limit (UEL). Above this limit you still pay NI but at the reduced 2% rate. This contrasts with income tax, which has no equivalent upper limit — income above £125,140 continues to be taxed at 45%.
Worked example: On a £40,000 salary, employee NI is calculated as: (£40,000 − £12,570) × 8% = £27,430 × 8% = £2,194.40 per year (£182.87/month). On a £60,000 salary: (£50,270 − £12,570) × 8% + (£60,000 − £50,270) × 2% = £37,700 × 8% + £9,730 × 2% = £3,016 + £194.60 = £3,210.60 per year.
Class 1: Employer NI
Employers pay their own separate Class 1 NI contributions on employee earnings. In 2026/27 the employer rate is 15% on earnings above the Secondary Threshold. The Secondary Threshold increased from £9,100 to £5,000 per year from April 2025, significantly increasing employer NI costs.
Employer NI is a cost to the business and does not appear on your payslip — it is paid in addition to your salary. However, it affects total employment costs and is the reason salary sacrifice schemes are attractive to employers as well as employees: salary sacrifice reduces both employee and employer NI.
The Employment Allowance allows eligible employers to reduce their employer NI bill by up to £10,500 per year (2026/27). Most small businesses qualify; businesses where the director is the sole employee do not.
Class 2 and Class 4: Self-Employed NI
Self-employed individuals pay NI through Self Assessment rather than PAYE.
Class 4 NI (2026/27)
Class 4 is the main NI contribution for the self-employed, based on taxable profits:
| Taxable Profits | Class 4 Rate |
|---|---|
| Up to £12,570 | 0% |
| £12,571–£50,270 | 6% |
| Above £50,270 | 2% |
Note the main rate is 6% for self-employed — versus 8% for employees. However, self-employed people do not receive employer NI contributions or many employee benefits, which partly offsets this.
Class 2 NI
Class 2 NI was a flat weekly contribution (£3.45/week in 2024/25) paid by self-employed people with profits above the Small Profits Threshold. It was effectively abolished from April 2024 for most purposes — self-employed individuals with profits above £12,570 now receive qualifying years automatically through Class 4. However, voluntary Class 2 contributions are still available for those below the threshold who wish to build their State Pension record.
NI and the State Pension
Each tax year in which you pay or are credited with sufficient NI contributions counts as a qualifying year towards the new State Pension. The rules for the new State Pension (which applies to those reaching State Pension age after 6 April 2016) are:
- 35 qualifying years — needed for the full new State Pension
- 10 qualifying years — minimum to receive any State Pension at all
- Between 10 and 35 years, you receive a proportional amount
The full new State Pension is £221.20/week (2025/26), increasing annually by the "triple lock" — the highest of earnings growth, CPI inflation, or 2.5%. Each qualifying year you add between 10 and 35 is worth approximately £6.32/week (£221.20 ÷ 35) in State Pension income for life.
You can check your State Pension forecast and NI record at any time via your Personal Tax Account on GOV.UK.
Gaps in Your NI Record
A gap in your NI record occurs in any tax year where you did not earn enough, pay sufficient NI, or receive NI credits to qualify. Common reasons include:
- Working part-time below the Lower Earnings Limit (£6,396/year in 2026/27)
- Being self-employed with low profits
- Periods of unemployment without claiming benefits
- Living or working abroad
- Taking time out for caring responsibilities
Gaps reduce your eventual State Pension. They can often be filled with voluntary contributions (see below) or retrospective NI credits. Check your record well before retirement — you generally have 6 years to fill most gaps, though the government's extended scheme allows filling gaps back to April 2006 until April 2025 (some deadlines may have passed by the time you read this — check GOV.UK for current deadlines).
NI Credits
NI credits protect your State Pension record during periods when you are not working or earning enough to pay NI. They count as qualifying years or weeks without requiring an actual financial contribution. You may receive automatic NI credits if you are:
- Claiming Child Benefit for a child under 12
- Receiving Universal Credit, Jobseeker's Allowance, or Employment and Support Allowance
- A carer providing at least 20 hours/week of care (Carer's Credit)
- On Statutory Maternity Pay or Statutory Paternity Pay
Some credits require you to apply — they are not always automatic. If you are a stay-at-home parent, ensure the Child Benefit claim (even if the high income charge means you repay it) is in your name, not your partner's, to receive the NI credit.
Voluntary NI Contributions (Class 3)
If you have gaps in your NI record and are not eligible for credits, you can make voluntary Class 3 contributions. The rate is £17.45 per week (2024/25) — around £907 per year. Filling one full gap year costs approximately this amount and adds roughly £6.32/week (£328/year) to your State Pension for life.
The return on investment is typically excellent. If you live 20 years into retirement, one filled gap year (cost ~£907) generates approximately £6,560 in additional State Pension income. However, you should only fill years that genuinely increase your total qualifying years to 35 — filling years beyond 35 has no effect on your State Pension.
Contact HMRC or use the voluntary contributions page at GOV.UK to check whether filling gaps is worthwhile in your case.