What is National Insurance?
National Insurance (NI) is a tax on earnings paid by employers and employees to fund various benefits including the state pension, statutory sick pay and maternity leave.
This guide is to help you as an employer to understand more about what National Insurance is used for and your responsibilities for paying it.
What is a National Insurance number and what is it for?
A National Insurance number is a form of individual tax identification that enables the taxes taken from an individual to be associated with them to demonstrate their eligibility for certain state benefits.
National insurance payments help to fund benefits such as state pensions, statutory sick pay, maternity and paternity leave. From April 2022, an NI increase will also contribute to the NHS and social care.
The class under which payment falls (from 1 to 4) all depends on a person’s employment status. People who are employed (and are under state pension age) pay Class 1 contributions.
Class 1 National insurance also includes subclasses 1A and 1B, which must be paid by employers on certain employee benefits like company cars and health insurance, as well as some other lump sums such as redundancy payments.
Who needs a National Insurance number?
Generally, anyone who wants to work in the UK needs a National Insurance number. Employees begin contributing once they start earning over £184 a week, or £6,515 a year if they are self-employed.
HM Revenue and Customs (HMRC) and the Department for Work and Pensions (DWP) use National Insurance numbers to identify individual’s contribution records.
How to apply for a National Insurance number
Every UK citizen will receive their National Insurance number automatically at 16. The number will appear on all payslips, P45s, and P60s received by an employee.
If you lose your NI number, visit the gov.uk site, where you can apply for it to be sent out. Once you have applied, this should arrive within 15 working days.
You can apply for an NI number if you live in the UK and have the right to work. Applying for a National Insurance number is free.
If you are a non-citizen, you can start working in the UK by proving you have right to work.
What are employee National Insurance contributions?
Employee National Insurance contributions are paid at a percentage rate and deducted as a tax from every pay slip. How much is subtracted from a person’s pay depends on how much they earn.
NI rates and how to calculate them
So, how much National Insurance do you pay as an employee and an employer? Once you’ve registered your business and begin paying staff wages, this all depends on weekly, monthly, and annual pay. It also depends on what category letter and NI threshold an employee falls into. Please see the gov.uk site for more information on both.
For the 2021/22 tax year national insurance rates are:
| Category letter | Employee (primary) contribution for earnings of between £184.01 and £967 per week | Employer (secondary) contribution for earnings of £170.01 to £967 per week |
|---|---|---|
| A | 12% | 13.8% |
| B | 5.85% | 13.8% |
| C | N/A - 0% | 13.8% |
| H (under 25 apprentice) | 12% | N/A - 0% |
| J | 2% | 13.8% |
| M (under 21) | 12% | N/A - 0% |
| Z (under 21 - deferment) | 2% | N/A - 0% |
Current at the time of writing (2021)
How are the national insurance rates in the UK changing?
As of April 2022, both employee and employer National Insurance contributions will be ‘temporarily’ increasing by 1.25%. This increase is expected to last until 2023, at which time this extra tax will be then collected separately under a Health and Social care levy, and the NI rates themselves are to return to 2021 levels. In short, you will still be paying the extra 1.25% come 2023, but it will not fall under National Insurance.
The decision was made by the Government in September 2021, to help fund the NHS and the gap in social care costs. These National Insurance changes also come alongside a 1.25% increase in tax dividend payments.
For small businesses who manage their own taxes, wages, and payments this may cause some disruption. To make the money management process a little easier, it might be a good idea to integrate custom payment software, to help make transactions and calculations that are a little bit smoother for you and your business.
The impact this will have on low-earning and self-employed workers and small businesses has come under much contention. The change in processes could start to make hiring staff more expensive, with each new head representing another percentage chunk of revenue never reaching the bank.
What is the National Insurance Employment Allowance scheme?
The National Insurance Employment Allowance scheme allows eligible employers to reduce their NI liability (how much you legally must contribute) by up to £4,000. You can claim on the Employment Allowance scheme if your Class 1 liabilities were £100,000 or less in the previous tax year.
This is only applicable to those paying Class 1 National Insurance, and the scheme lasts until the tax year is up, or until the £4,000 has been spent. You do not have to have NI liability of over £4,000 to apply – in this case, for example, you would have to re-apply when the tax year ends.
The scheme aims to help small businesses by lifting some of the obligatory employer tax contributions. For example, it can go some way in alleviating the impact hiring new team members may have on your expenses and profits.
How do I apply for NI Employment Allowance?
There are two ways in which you can apply for NI Employment Allowance. For more information and to apply, visit gov.uk.
Using your in-house payroll software
Fill out your HMRC Employment Payment Summary (EPS) as normal.
Fill out ‘Yes’ in the ‘Employment Allowance indicator’ section.
Select the business sectors that apply to your business.
Using HMRC’s PAYE software
- Select your name on the Employer menu.
- Go to ‘Change employer details’, and then choose ‘Yes’ in the ‘Employment Allowance indicator’ section.
- Choose ‘Yes’ on ‘Do state aid rules apply?’ if you sell goods/services. If not, choose ‘No’ and select ‘State aid rules do not apply.’
- Fill out and send your EPS as normal.
- National Insurance doesn’t have to be complicated or daunting, but, as a small business owner, it’s good to know the ‘how’s and ‘why’s, so you can answer any questions your employees might have.
- It’s also important to know exactly where your money’s going, which is why Square’s POS system helps you keep on top of stock, staff, income, and outgoings - all in one place.