Our guide to national insurance contributions

By alisonbarlow|Jan 30, 2025|5:51 pm GMT

The Autumn Budget introduced several changes to national insurance contributions (NIC) that will significantly impact employers throughout the hospitality industry. Coming into effect on 6 April 2025, they include:

1. An increase in employer NIC, which will jump from 13.8% to 15%, increasing the cost of labour.
2. A drop in the threshold for national insurance contributions from £9,100 to £5,000, increasing the number of part-time and lower-paid workers that employers pay NIC for.
3. Removing the £100,000 NIC liability cap for Employment Allowance (EA) so more employers qualify for NIC relief.

National insurance is a major component of UK payroll, and all employers are legally obligated to stay up-to-date and compliant with NIC changes. In this guide, we’ll take you through the basics of NIC, the incoming changes, and how best to prepare for them.

What are national insurance contributions?

National insurance (NI) is a direct tax on earnings that funds state pensions and benefits. Employees’ NI contributions are automatically deducted from their income from 16 until they reach state pension age.

Employers also pay national insurance contributions (NIC) for each employee who earns over a certain threshold; this is separate from the employee’s contribution and doesn’t count towards their total package or remuneration.

How do national insurance contributions work?

Unlike income tax, which is charged annually for total earnings (regardless of how many jobs an employee does), NI is charged for each pay period and independently of any other employment. This means changes in earnings or benefits are reflected immediately in NI contributions.

Employers are responsible for paying NICs on all employees’ earnings above a threshold, as well as managing deductions for employee national insurance contributions:

• Employee contributions (Class 1 primary) are deducted from employees’ gross pay based on their earnings.
• Employer contributions (Class 1 secondary) are paid directly by the employer on qualifying earnings at a rate determined by the earnings amount.

What do national insurance contributions pay for?

National insurance helps to fund a range of benefits. Class 1 contributors (employees) pay towards:

• Basic State Pension
• Additional State Pension
• New Style Jobseeker’s Allowance
• Contribution-based Employment and Support Allowance
• Maternity Allowance
• Bereavement Support Payment

Self-employed, Class 2, workers contribute to the same benefits except Additional State Pension and New Style Jobseeker’s Allowance. Class 3 contributors are voluntary contributions for those who haven’t paid enough and only fund Basic State Pension and New State Pension.

Do I have to pay national insurance contributions?

Employers must pay NIC on employees’ earnings, benefits, and expenses. In April 2025, the NIC rate will rise from 13.8% to 15%. At the same time, the threshold for employer contributions will reduce from £9,100 to £5,000, meaning employers must contribute 15% of an employee’s earnings as NIC once they have earned more than £5,000 per year.

How much do you pay for national insurance contributions?

The exact amount employees contribute to national insurance depends on their circumstances. For hospitality operators and employers, Class 1 contributions are the most relevant since these relate to employed workers.

Class 1

Class 1 national insurance is paid by employees from 16 until they reach the state pension age. They pay 12% on earnings above the Primary Threshold of £242 per week (or £12,570 per year) and 2% on earnings over the Upper Earnings Limit (UEL) of £967 per week (or £50,270 per year). Workers earning less than £242 per week do not pay NICs but retain the right to receive certain benefits if their earnings are above the Lower Earnings Limit (LEL) of £125 per week.

Employers pay Secondary Class 1 national insurance contributions on employee earnings above the Secondary Threshold. From April 2025, this will be 15% on earnings over £96 per week. Currently, the rate is 13.8% on earnings above £175 per week.

Employers must also pay Class 1A contributions annually on taxable employee benefits, such as work phones or private healthcare. These contributions must be paid by July 22, following the end of the tax year. It is likely that payrolling benefits will become mandatory from 2026, meaning Class 1A contributions will be calculated and paid on a pay period basis rather than annually.

Class 2

Self-employed workers with more than £6,725 annual profit pay Class 2 NI. This is voluntary; workers opt to pay it to protect their NI record and maintain access to benefits.

Class 3

Another voluntary NI band, Class 3 is paid by those seeking to fill gaps in their NI record and maintain access to benefits like State Pension. It can be backdated for the previous six tax years.

Class 4

Class 4 NI is a secondary category for self-employed people with profits over £12,570. Contributions amount to 6% on profits exceeding £12,570 and 2% on any profit over £50,270.

Are employees’ national insurance contributions taxable?

While earmarked to support specific purposes, like maternity allowance and state pension, NICs are a direct tax. As such, employer NICs (Class 1) do not count as additional income and are not taxable.

Income tax is calculated based on gross earnings before NI is deducted, so employee NI contributions don’t reduce taxable income, either.

Are national insurance contributions capped?

Each of the NI classes (from Class 1 to Class 4) has its own thresholds and rates. For those running payroll, only Class 1 and Class 1A are relevant, since Class 2, 3 and 4 are either voluntary or applicable to those who are self-employed.

• Class 1 contributions are not capped. From April 2025, the secondary NIC rate, paid by employers, is 15% above the secondary threshold. Before April 2025, it is 13.8%.
• Class 1A contributions are also not capped and are paid at the same rate as Class 1 on most benefits provided to employees, such as health insurance, gym membership, or living accommodation.

Can employees stop paying national insurance contributions after 30 years?

Employees need 35 years of NI contributions to qualify for a State Pension and cannot stop paying NI before reaching the state pension age. However, anyone who reaches state pension age and decides to continue working is not required to pay NI, although employer NIC will still be due on their earnings.

Can I opt out of national insurance contributions?

Employers are legally obligated to pay NIC. However, those eligible for Employment Allowance (EA) can use it to offset their NIC liability, potentially reducing it to a minimal amount.

Before April 2025, EA was intended to support smaller businesses, excluding employers with an annual NI contribution of over £100,000. From April 2025, this criterion has been removed, meaning larger employers may qualify for EA for the first time. Eligible employers will only pay NIC for the amount exceeding their £10,500 EA allowance.

Payments to agency staff or Off-Payroll workers are not included in employers’ Class 1 liabilities and won’t count towards the £10,500 allowance.

How Fourth’s payroll solutions can help with national insurance contributions

Leading hospitality operators trust Fourth’s HR and Payroll solutions to help them manage national insurance contributions, simplify compliance, improve accuracy, and save time.

The benefits of Fourth:

• Integrated platform: Manage your entire team with a comprehensive HR and Payroll solution that integrates with AI-driven forecasting, scheduling, and more.
• Batch updates and automation: Update multiple records at once and set automation rules to reduce the manual workload for HR and Payroll teams.
• Regular updates: Annual product updates every spring enable operators to stay ahead of and compliant with the latest legislative changes