Employees pay Class 1 National Insurance contributions. Minimising employees' Class 1 NI contributions directly benefits the employee. It also benefits the employer, by making it easier to recruit and retain employees
Class 1 National Insurance for employees
As an employee, you are liable for 'primary' Class 1 National Insurance contributions. Your employer pays 'secondary' Class 1 National Insurance contributions. Both types of Class 1 NI are collected through the PAYE system operated by the employer.
Employees' Class 1 NI contributions are charged on earnings between the primary threshold of £190 per week and the upper earnings limit of £967 per week in 2022/23. The Additional rate of NICs is payable on earlings above £967 er week.
The single-tier state pension came into force in 2016. As a result of the abolition of the state second pension, it is no longer possible to 'opt out'. The Class 1 NI contributions rebate has been removed and all employees, with few exceptions, are liable to the same rate of Class 1 NICs on earnings above the primary threshold.
National Insurance rates in 2022/23
The government announced that employers NICs and employee NICs would be increasing by 1.5% from April 2022. This meant that employees' NICs increased to 13.25% on earnings between the primary threshold and the upper earnings limit and at 3.25% on earnings above the upper earnings limit.
This increase was subsequently repealed meaning that different rates were in force at different points during the 2022/23 tax year.
|Main rate||Additional rate||Date payable|
|13.25%||3.25%||On or before 5 November 2022|
|12%||2%||On or after 6 November 2022|
Any Class 1A NICs payable on relevant termination and/or testimonial payments will be due at the rate applicable at the time of payment as per the table above.
Note: A special 'blended rate' of employee NICs of 12.73% will apply to company directors who are subject to annual earnings period rules on earnings between the primary threshold and the upper earnings limit, and the blended additional rate is 2.73% on any further earnings.
A blended rate of 14.53% will apply to Class 1A NIC payable on Benefits-in-Kind (BIKs) for 2022/23 and any Class 1B NIC due in relation to PAYE settlement agreements.
Class 1 NI: special cases
Directors pay Class 1 NI contributions on their employment earnings at the same rates as other employees. But rather than using weekly or monthly earnings, Class 1 NI contributions are based on annual earnings. This means that directors who have fluctuating earnings will pay the same amount of Class 1 NI contributions as they would if their earnings were spread evenly through the year.
If you have more than one job, you can end up paying more Class 1 NI than is due, as NICs could be charged on too large an amount of your total earnings from all your jobs. You can apply to have some Class 1 NI deferred if this is likely to apply or reclaim the excess after the tax year end.
If you are both employed and self-employed, then it is possible to end up paying more in employee's Class 1 and self-employed Class 2 NI contributions than the total annual limit payable. Again, some contributions can be deferred or reclaimed.
Class 1 NI contributions are payable on almost all cash payments an employee receives. Cash tips received directly from a customer, or where the employer has no influence over how tips are shared out, are exempt from NI (but are still taxable). Compulsory service charges are not exempt.
Minimising Class 1 National Insurance
Employees' Class 1 NI contributions are payable on any cash payments, including bonuses and other incentive payments. But Class 1 NI is not generally payable on benefits unless they are either cash or cash-like (for example, vouchers that can be exchanged for cash). So employee benefits such as childcare vouchers can be a useful way of reducing Class 1 NI contributions payable (and in some cases tax as well).
The most significant benefit can be employers' pension contributions. If an employer contributes directly to the employee's pension scheme, no Class 1 NI contributions are payable by either employer or employee. A properly arranged salary sacrifice scheme - where employees accept a lower salary but receive higher pension contributions - offers significant Class 1 NI savings.
If you own your own company, you may be able to make substantial Class 1 NI savings by taking dividends rather than salary. Dividends can only be paid out of distributable profits (so not if the company has accumulated losses) following proper procedures, and cannot be paid selectively only to chosen shareholders. Dividend income over the current allowance of £2,000 will be subject to tax.
The 'IR35' rules on personal services companies, and rules on managed services companies, have made it difficult to take advantage of this if you are providing personal services through a company (for example, as an IT contractor). In these cases, the rules broadly ensure that the tax and NI treatment of any payment - including dividends - is the same as for employment income.