TX · Certificate Level

National Insurance Contributions

Class 1 National Insurance contributions: primary (employee) and secondary (employer) — earnings thresholds, rates, and the upper earnings limit. Class 1A contributions on benefits in kind. Class 2 and Class 4 contributions for self-employed individuals. The employment allowance. Worked examples calculating NIC for employees and self-employed individuals.

25 min read

Learning Objectives

•Explain the purpose of National Insurance contributions and who pays each class
•Calculate Class 1 primary (employee) NIC using the correct thresholds and rates
•Calculate Class 1 secondary (employer) NIC using the correct thresholds and rates
•Explain how Class 1A NIC is calculated on benefits in kind
•Calculate Class 2 and Class 4 NIC for self-employed individuals
•Explain the employment allowance and which employers qualify

NIC Overview

National Insurance contributions are payments made by employees, employers, and self-employed individuals that fund the state pension, certain benefits (Jobseeker's Allowance, statutory sick pay, maternity pay), and the NHS.

Classes of NIC:

Class	Who pays	On what
Class 1 Primary	Employee	Earnings from employment (salary, wages, bonuses, commission)
Class 1 Secondary	Employer	Employee's earnings from employment
Class 1A	Employer	Most taxable benefits in kind (car, fuel, medical insurance, etc.)
Class 2	Self-employed	Flat-rate weekly amount (if profits exceed the small profits threshold)
Class 4	Self-employed	Trading profits (percentage-based, similar structure to Class 1)

Key distinction from income tax: NIC is calculated on a per-employment, per-pay-period basis (weekly/monthly), not cumulatively over the tax year. Each employment is assessed separately. There is no personal allowance equivalent for NIC — contributions start from the first £ above the threshold.

Class 1 NIC — Employees and Employers

Class 1 Primary (employee) NIC — 2024/25 rates:

Earnings band	Rate
Below the Primary Threshold (PT): £242/week (£12,570/year)	0% — no employee NIC
Between the PT and the Upper Earnings Limit (UEL): £967/week (£50,270/year)	8%
Above the UEL	2%

Class 1 Secondary (employer) NIC — 2024/25 rates:

Earnings band	Rate
Below the Secondary Threshold (ST): £175/week (£9,100/year)	0% — no employer NIC
Above the ST	13.8%

Note: There is no upper limit for employer NIC — the employer pays 13.8% on ALL earnings above the secondary threshold, with no cap. This contrasts with employee NIC which drops to 2% above the UEL.

Earnings included for Class 1: Salary, wages, overtime, bonuses, commission, sick pay (SSP and contractual), most cash payments from employment. Not included: Benefits in kind (these are subject to Class 1A instead), employer pension contributions, genuine business expenses reimbursed, redundancy payments up to £30,000.

How NIC is collected: Employer deducts the employee's Class 1 primary NIC from gross pay through PAYE and accounts for both primary and secondary NIC to HMRC (typically monthly, or quarterly for small employers).

Class 1A NIC — Benefits in Kind

Class 1A NIC is paid by the employer only on the taxable value of most benefits in kind provided to employees. The employee does NOT pay Class 1A.

Class 1A = Taxable value of the benefit × 13.8%

Benefits subject to Class 1A: Company car, fuel benefit, private medical insurance, living accommodation benefit (if taxable), beneficial loans (if taxable), use of assets, and most other taxable BIKs.

Payment: Class 1A is paid annually by the employer by 19 July (or 22 July if paying electronically) following the end of the tax year. It is reported on form P11D(b).

Class 1A is a cost to the employer — it is an additional employment cost on top of the benefit itself. It is an allowable deduction for the employer when calculating trading profits.

Class 2 and Class 4 NIC — Self-Employed

Self-employed individuals pay two classes of NIC on their trading profits:

Class 2 NIC:

A flat-rate weekly contribution: £3.45 per week (2024/25) = approximately £179.40/year
Only payable if trading profits exceed the Small Profits Threshold (SPT): £6,725/year (2024/25). If profits are below this, Class 2 is not due (but the individual can voluntarily pay to protect their state pension entitlement).
Collected through self-assessment (paid with the balancing payment on 31 January)
Class 2 contributions count towards the state pension and certain contributory benefits

Class 4 NIC:

Profits band	Rate
Below the Lower Profits Limit (LPL): £12,570/year	0%
Between the LPL and the Upper Profits Limit (UPL): £50,270/year	6%
Above the UPL	2%

Class 4 is calculated on the same trading profits used for income tax (adjusted profits after capital allowances). Collected through self-assessment — payments on account follow the same schedule as income tax (31 January and 31 July).

Class 4 does NOT count towards the state pension — it is essentially an additional tax on self-employed profits. Only Class 2 builds pension entitlement for the self-employed.

Employment Allowance

The employment allowance reduces the employer's Class 1 secondary NIC liability by up to £5,000 per year (2024/25).

Who qualifies:

Available to employers (businesses and charities) whose total employer NIC liability in the previous tax year was below £100,000
Not available to: companies where the director is the sole employee, public sector bodies (e.g., local authorities, NHS trusts), or companies whose secondary NIC liability in the prior year exceeded £100,000

How it works: The employer does not pay the first £5,000 of their secondary Class 1 NIC liability. It is applied automatically through the PAYE system — each month, the employer's NIC liability is reduced until the £5,000 allowance is used up.

Significance: For small employers, the employment allowance can eliminate the entire employer NIC cost. For example, an employer with one employee earning £25,000 would have secondary NIC of approximately (£25,000 − £9,100) × 13.8% = £2,194 — fully covered by the £5,000 allowance.

Summary Comparison — Employed vs Self-Employed NIC

Feature	Employed	Self-employed
Employee/individual NIC	Class 1 Primary: 8% (PT to UEL) + 2% (above UEL)	Class 4: 6% (LPL to UPL) + 2% (above UPL) + Class 2: £3.45/week flat rate
Employer NIC	Class 1 Secondary: 13.8% (above ST, no cap) + Class 1A: 13.8% on BIKs	N/A (no employer)
Total NIC burden	Higher — combined employee + employer NIC significantly exceeds self-employed NIC. This is a key reason why some individuals prefer self-employment.	Lower — Class 4 at 6% is lower than Class 1 at 8%, and there is no employer NIC.
Pension entitlement	Class 1 builds full pension entitlement	Only Class 2 builds pension. Class 4 does not.
Collected via	PAYE (monthly)	Self-assessment (31 Jan and 31 Jul POAs)

Examiner Focus

NIC calculations are tested very frequently — often alongside income tax computations. You must know: Class 1 primary 8%/2% (PT/UEL), Class 1 secondary 13.8% (ST, no cap), Class 1A 13.8% on BIKs, Class 4 6%/2% (LPL/UPL), Class 2 £3.45/week. These rates and thresholds will be in the tax tables provided, but knowing them saves time.

Common Pitfall

Class 1 NIC is calculated on CASH EARNINGS only — salary, wages, bonuses, commission. Benefits in kind are subject to Class 1A (employer only), NOT Class 1. Students frequently make the error of including BIKs in the Class 1 calculation.

Study Tip

There is NO UPPER LIMIT for employer Class 1 secondary NIC — the employer pays 13.8% on ALL earnings above the ST. This is different from employee NIC, which drops to 2% above the UEL. The employer's NIC cost on high earners is very significant.

Examiner Focus

The employed vs self-employed NIC comparison is a popular discussion question. Key points: employed = higher total NIC (Class 1 primary + employer secondary + Class 1A). Self-employed = lower (Class 4 at 6% + Class 2 flat rate). This NIC saving is one reason people prefer self-employment. But remember IR35 — disguised employees must pay as if employed.

Watch Out

Class 4 NIC does NOT build state pension entitlement. Only Class 2 does for the self-employed. This is an important planning point — self-employed individuals should ensure they pay Class 2 to protect their pension record.

Common Pitfall

The employment allowance (£5,000 off employer secondary NIC) is NOT available to: single-director companies (where the director is the only employee), public sector employers, or employers whose prior year secondary NIC exceeded £100,000. Students sometimes apply it incorrectly.

Key Definitions

Class 1 Primary NIC

Employee NIC on earnings from employment. 8% on earnings between the PT (£12,570/year) and UEL (£50,270), 2% above the UEL. Deducted through PAYE.

Class 1 Secondary NIC

Employer NIC on employee earnings. 13.8% on all earnings above the ST (£9,100/year) with NO upper limit. A significant additional employment cost.

Primary Threshold (PT)

The earnings level above which employees start paying Class 1 NIC. £242/week (£12,570/year for 2024/25). Aligned with the income tax personal allowance.

Upper Earnings Limit (UEL)

The earnings level above which the employee NIC rate drops from 8% to 2%. £967/week (£50,270/year). Aligned with the higher rate income tax threshold.

Secondary Threshold (ST)

The earnings level above which employers start paying Class 1 NIC. £175/week (£9,100/year). Lower than the PT — employers start paying NIC before employees do.

Class 1A NIC

Employer-only NIC at 13.8% on the taxable value of benefits in kind. Paid annually by 19/22 July following the tax year.

Class 2 NIC

Flat-rate weekly NIC for the self-employed: £3.45/week. Only due if profits > SPT (£6,725). Builds state pension entitlement.

Class 4 NIC

Percentage-based NIC on self-employed trading profits. 6% on profits between LPL (£12,570) and UPL (£50,270), 2% above UPL. Does NOT build pension entitlement.

Employment allowance

Reduces employer Class 1 secondary NIC by up to £5,000/year. Available to employers with prior year secondary NIC < £100,000. Not for single-director companies.

Small Profits Threshold (SPT)

£6,725/year (2024/25). Self-employed individuals with profits below this are not required to pay Class 2 NIC (but may pay voluntarily for pension credits).

Key Formulas

Worked Examples

Practice Questions

Question 1 of 8

Class 1 primary (employee) NIC is calculated on:

Question 2 of 8

An employee earns £55,000. The Class 1 primary NIC (2024/25) is approximately:

Question 3 of 8

Employer Class 1 secondary NIC differs from employee NIC because:

Question 4 of 8

Class 1A NIC at 13.8% on benefits in kind is paid by:

Question 5 of 8

A self-employed individual with trading profits of £30,000 pays Class 4 NIC of:

Question 6 of 8

Class 2 NIC for the self-employed:

Question 7 of 8

The employment allowance allows qualifying employers to reduce their Class 1 secondary NIC by:

Question 8 of 8

Compared to employment, self-employment results in:

Source and Version

Syllabus: ICAEW ACA Certificate Level 2026 · Reviewed: 2026-05-04

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