What Is National Insurance?
National Insurance (NI) is a tax that helps fund state benefits such as the State Pension, maternity allowance and certain unemployment benefits.
Employers must deduct the correct NI from employees’ pay and also pay employer NI on top.
This guide explains how NI works, what employers must do, and the common mistakes to avoid.
What National Insurance Does
National Insurance:
Helps fund state benefits
Determines employees’ State Pension entitlement
Applies differently depending on age and employment status
Must be calculated correctly every pay period
Is reported to HMRC through RTI
It works alongside PAYE but is calculated differently from Income Tax.
Employee National Insurance (Class 1 Primary)
Employees pay NI on their earnings above certain thresholds if they:
Are aged 16 or over
Earn above the Lower Earnings Limit
Are classified as employees for PAYE
How employee NI works
Employee NI is deducted:
Automatically through payroll
Based on earnings in that pay period
At different percentage rates depending on thresholds
Payroll software does the calculation — but only when the correct NI category letter is used.
Employer National Insurance (Class 1 Secondary)
Employers also pay NI contributions on their employees’ earnings.
Employer NI:
Applies once earnings pass the Secondary Threshold
Is not deducted from the employee
Must be paid to HMRC along with PAYE
Can be reduced using reliefs such as the Employment Allowance (if eligible)
Employer NI is often overlooked as a significant employment cost.
National Insurance Category Letters
NI calculations depend on using the correct NI category.
Key categories include:
A – Standard employees
B – Married women/widows with reduced rate (rare)
C – Employees over State Pension age
H – Apprentices under 25
M – Employees under 21
Z – Under 21 with deferred NI
J – Employees with more than one job (deferred NI)
Using the wrong NI category is one of the most common payroll mistakes.
How National Insurance Is Calculated
NI uses:
The employee’s earnings in the pay period
Their NI category
The current NI thresholds and rates
Whether they are a director (special rules apply)
Whether salary sacrifice reduces NI-able pay
Important differences from tax:
NI is not cumulative — it resets every pay period
Tax uses tax codes; NI does not
NI thresholds differ depending on category
Directors are calculated using annual earnings method unless alternative arrangements are used
Special Rules for Directors
Directors follow an annual earnings period, meaning NI is smoothed over the year.
This prevents over- or under-deduction due to fluctuating pay.
Two methods exist:
Director’s annual method (default)
Alternative arrangements method – spreads NI more evenly during the year
This is an area where mistakes are common.
Salary Sacrifice and National Insurance
Salary sacrifice:
Reduces NI for both employers and employees
Must be set up correctly
Changes NI-able pay, not taxable pay
Can affect pension contributions and statutory payments
Incorrect handling often leads to underpayments or overclaims.
Reporting National Insurance to HMRC (RTI)
Every pay run, NI must be reported on:
FPS – Full Payment Submission
EPS – for adjustments, recoveries or allowances
Incorrect reporting can trigger HMRC queries.
When Employers Pay HMRC
PAYE, employee NI, employer NI and other deductions must be paid to HMRC:
By the 22nd of the following month (if paying electronically)
Or the 19th (if paying by cheque/post)
Quarterly payment options exist for small employers.
Employer Responsibilities
Employers must:
Apply correct NI category letters
Deduct the correct employee NI
Pay the correct employer NI
Apply director NI rules properly
Handle salary sacrifice accurately
Keep payroll records for at least 3 years
Submit accurate RTI returns
Pay HMRC on time
Even with payroll software, the employer remains legally responsible.
Common National Insurance Mistakes
Typical issues include:
Wrong NI category (A instead of M, C instead of A, etc.)
Incorrect director NI calculations
Salary sacrifice reducing taxable but not NI earnings
Missing apprenticeship or under-21 relief
Incorrect treatment of part-year workers
NI deducted from employees over State Pension age
Wrong thresholds due to outdated payroll software
These errors can lead to overpayments, underpayments or HMRC interventions.
FAQ: National Insurance for Employers
Do employees stop paying NI at State Pension age?
Yes — but employers must still pay employer NI unless in an exempt category.
Do NI category letters change automatically?
No. Employers must update categories when circumstances change (e.g., age milestones).
Can NI be refunded if calculated incorrectly?
Yes — payroll can correct NI errors in-year or through amended FPS.
Is NI the same as PAYE?
No — they are different calculations, thresholds and rules, but both flow through payroll.