National Insurance (NI) is a tax system in the United Kingdom that funds the State Pension, NHS, and various welfare benefits. Contributions are made by both employees and employers, and the rates depend on earnings and employment status. However, certain payments made by employers are exempt from National Insurance contributions. Understanding these exemptions can help both employers and employees manage finances more effectively.
Why Do We Pay National Insurance?
National Insurance was introduced to provide financial security through the State Pension and other benefits such as maternity pay and unemployment support. Contributions ensure you qualify for these benefits when needed.
Categories of National Insurance
National Insurance contributions are divided into different classes based on employment status and income:
Class 1: Employees and Employers
- Who pays: Employees earning above £242 per week and their employers.
- How it works: Deducted monthly through PAYE (Pay As You Earn).
- Benefits: Entitles you to the State Pension, Jobseeker’s Allowance, and more.
Class 2: Self-Employed Individuals
- Who pays: Self-employed individuals earning above £12,570 per year.
- How it works: Paid annually but can be broken down into monthly amounts.
- Benefits: Covers State Pension and some other benefits.
Class 3: Voluntary Contributions
- Who pays: Those filling gaps in their NI record.
- How it works: Paid directly to HMRC, can be divided into monthly payments.
- Benefits: Helps qualify for full State Pension.
National Insurance Monthly Rates for 2024/25
Class 1 Rates (Employees and Employers)
- Employees:
- 0% on earnings up to £1,048 per month.
- 12% on earnings between £1,048 and £4,189 per month.
- 2% on earnings above £4,189 per month.
- Employers:
- 0% on earnings up to £758 per month.
- 13.8% on earnings above £758 per month.
Class 2 Rates (Self-Employed)
- Monthly rate: £3.45 × 4.33 weeks ≈ £14.95 per month (if annual earnings exceed £12,570).
Class 3 Rates (Voluntary Contributions)
- Monthly rate: £17.45 × 4.33 weeks ≈ £75.56 per month.
Class 4 Rates (Self-Employed Based on Profits)
- 9% on monthly profits between £1,048 and £4,189.
- 2% on monthly profits above £4,189.
Employer Payments Exempt from National Insurance
Certain payments made by employers are exempt from National Insurance contributions. Understanding these exemptions can help both employers and employees plan more effectively.
1. Reimbursed Expenses
- Exempt: Payments for expenses incurred by employees in the performance of their duties (e.g., business travel, accommodation, and subsistence).
- Example: If an employee spends £200 on travel for a business meeting, and the employer reimburses this amount, it is exempt from NI contributions.
2. Trivial Benefits
- Exempt: Gifts and benefits that cost £50 or less per employee, provided they are not cash or cash vouchers and are not part of the employee’s contract.
- Example: A £30 gift card for a coffee shop given to employees at Christmas.
3. Pension Contributions
- Exempt: Employer contributions to registered pension schemes are not subject to National Insurance.
- Example: An employer contributes £200 per month to an employee’s pension plan without triggering NI contributions.
4. Salary Sacrifice Arrangements
- Exempt: Contributions to benefits like childcare vouchers, cycle-to-work schemes, or additional pension contributions under approved salary sacrifice arrangements.
- Example: An employee agrees to reduce their salary by £100 per month to receive childcare vouchers, which are exempt from NI contributions.
5. Employee Training Costs
- Exempt: Payments made by employers for work-related training or education courses.
- Example: An employer pays £500 for a professional course for an employee, which is not subject to NI contributions.
Simple Monthly Examples of National Insurance Contributions
Example 1: Employee Earning £3,000 per Month
- Earnings above £1,048: £1,952
- NI at 12% on £1,952: £234.24
- NI at 2% (not applicable here as earnings are below £4,189).
Total Monthly NI Contribution: £234.24
Example 2: Self-Employed with £2,000 Monthly Profit
- Class 2: £14.95 per month.
- Class 4:
- Profits above £1,048 = £952.
- 9% on £952 = £85.68.
Total Monthly NI Contribution: £14.95 + £85.68 = £100.63
Example 3: Self-Employed with £6,000 Monthly Profit
- Class 2: £14.95 per month.
- Class 4:
- 9% on profits between £1,048 and £4,189 = £3,141 × 9% = £282.69.
- 2% on profits above £4,189 = £1,811 × 2% = £36.22.
Total Monthly NI Contribution: £14.95 + £282.69 + £36.22 = £333.86
How to Check Your National Insurance Record
To ensure you qualify for the State Pension and other benefits, check your NI record on the HMRC website. If you find gaps, you might consider making Class 3 voluntary contributions.
Conclusion
Understanding National Insurance contributions and the payments that are exempt can help you manage your finances more effectively. For personalised advice, consult a tax professional or use HMRC’s resources.