What is National Insurance?
National Insurance is a UK system where employees, employers, and some self-employed workers make contributions through earnings. These payments help fund the State Pension, certain benefits and parts of the NHS (National Health Service).
National Insurance remains one of the UK's largest sources of tax revenue, with contributions expected to raise more than £205 billion in 2025/26.
What does National Insurance pay for?
National Insurance helps fund a range of state benefits and public services across the UK. While contributions are not allocated to specific services, they support areas such as:
- Employment and support-related benefits
For employers, National Insurance is a key part of payroll and employment costs. Understanding how the system works can help businesses budget accurately, stay compliant with HMRC requirements, and avoid payroll errors.
Who pays National Insurance?
Most people in work pay National Insurance, but the amount depends on their employment status and earnings.
Typically, National Insurance is paid by:
- Employers on behalf of their employees
- Self-employed individuals through their tax returns
For businesses, Employer National Insurance is usually payable on employee earnings above a set threshold. Contributions are calculated and reported through payroll and paid directly to HMRC.
What is a National Insurance number?
A National Insurance number is a unique personal reference used by HMRC and other government departments to track an individual's tax and National Insurance record throughout their working life.
Every employee should have their own National Insurance number, which is typically provided before they start work. Employers use it when processing payroll, reporting earnings, and submitting information to HMRC.
Using the correct National Insurance number helps ensure contributions are recorded accurately and employees receive the correct entitlement to benefits and the State Pension.
How National Insurance works for employers
For most businesses, National Insurance is handled as part of the payroll process:
- Check employee earnings against National Insurance thresholds.
- Calculate contributions for both the employee and employer.
- Deduct employee National Insurance through PAYE.
- Report contributions to HMRC through payroll submissions.
- Pay HMRC by the required deadline.
Why National Insurance matters for businesses
National Insurance is one of the biggest employment costs many businesses face. Alongside salaries, pensions and benefits, Employer National Insurance can have a significant impact on payroll budgets and hiring plans.
It also plays an important compliance role. Mistakes or late payments can quickly become expensive. HMRC may charge penalties of up to 5% of unpaid PAYE and National Insurance after 30 days, with further 5% penalties after six and 12 months if the balance remains unpaid.
Late payment interest also applies. Keeping payroll accurate helps businesses avoid unnecessary costs and stay on the right side of HMRC.
National Insurance example [with calculation]
A graphic design agency hires a designer on a salary of £35,000 a year (about £2,917 a month). Each month, the payroll system automatically calculates National Insurance:
- The employee pays National Insurance through deductions from their salary.
- The employer also pays Employer National Insurance on top of the salary.
Using 2025/26 rates:
- Employee National Insurance threshold: £12,570
- Earnings subject to Employee National Insurance: £22,430
- Employee National Insurance at 8%: £1,794 per year (about £150 per month)
For the employer:
- Employer National Insurance threshold: £5,000
- Earnings subject to Employer National Insurance: £30,000
- Employer National Insurance at 15%: £4,500 per year (about £375 per month)
The employer reports both amounts to HMRC through PAYE and pays them alongside other payroll liabilities. This means a £35,000 salary actually costs the business around £39,500 a year before pension contributions and other employment costs are taken into account.
National Insurance vs Income Tax
Income Tax helps fund general government spending, while National Insurance supports the UK's social security system and helps build entitlement to certain benefits, including the State Pension.
| Feature |
National Insurance |
Income Tax |
| Basis |
Based on earnings and employment status |
Based on taxable income |
| Who pays? |
Paid by employees, employers and some self-employed workers |
Paid by individuals on taxable income |
| Purpose |
Helps fund state benefits and the State Pension |
Helps fund public services and government spending |
| Impact |
Builds a National Insurance record |
Does not affect benefit entitlement |
| Calculation |
Calculated separately from Income Tax |
Calculated using Income Tax bands and rates |
When do you stop paying National Insurance?
Most employees stop paying National Insurance once they reach the State Pension age. However, employers may still need to manage National Insurance reporting through payroll. Self-employed individuals may have different rules depending on their earnings and circumstances.
Note: Always check the latest HMRC guidance, as eligibility and thresholds can change.
FAQs
1. Is National Insurance the same as tax?
No. National Insurance and Income Tax are separate deductions. Income Tax funds general government spending, while National Insurance helps fund certain state benefits and contributes towards entitlement to the State Pension.
2. Do employers pay National Insurance?
Yes. Most employers pay Employer National Insurance contributions on employee earnings above the relevant threshold. This is a business cost paid in addition to salary and is reported through payroll.
3. Do I need a National Insurance number to employ staff?
Yes. Employers should record each employee's National Insurance number where available. This helps ensure payroll information is reported correctly to HMRC and contributions are allocated to the right person.
