Getting to grips with your tax responsibilities is a reality for every business owner, and National Insurance is no exception. But what is employers’ National Insurance and how does it differ from other types of National Insurance? Our National Insurance guide for small businesses will aim to lift the lid on all that and more.
What are National Insurance contributions?
National Insurance is a tax on earnings and self-employed profits. Your National Insurance contributions enable you to qualify for a State Pension and other benefits. National Insurance was first introduced in the UK in 1911 as a safety net to protect working people from financial hardship following a loss of income due to sickness or unemployment.
What is employers’ National Insurance?
Employers pay a secondary National Insurance contribution; for a number of years this has been set at 13.8% on every pound an employee earns above the £8,840 per annum Secondary National Insurance threshold (2021/22), but from April 2022, the rate will be raised to 15.05% on employee’ earnings above £8,844 per year.
Who pays National Insurance?
- Employees pay National Insurance if they earn more than £184 a week.
- Self-employed people pay National Insurance if they make a profit of £6,515 or more per annum.
- Employers pay an additional National Insurance contribution for staff earning above the employers’ National Insurance rate threshold.
These contributions (for employers and employees) will increase by 1.25% from 6th April 2022.
Individuals can also pay voluntary National Insurance contributions if they want to fill any gaps in their National Insurance record to qualify for a State Pension and any additional benefits, such as Jobseekers’ Allowance and Bereavement Support Payments.
You don’t need to pay National Insurance contributions when you reach State Pension age, with some exceptions, such as self-employed people who pay Class 4 National Insurance. Next, we’ll cover what these different National Insurance classes mean.
What are the National Insurance classes?
There are different types, or ‘classes’, of National Insurance depending on your employment status (employee or self-employed), your earnings and your record of National Insurance contributions. Here is a summary of the types of National Insurance:
- Class 1 National Insurance – paid by employees earning more than £184 per week if they’re under the State Pension age.
- Class 1A or 1B National Insurance – paid directly by employers on the expenses or benefits they give to employees. Employers may also pay Class 1A contributions on lump sums like redundancy payments.
- Class 2 National Insurance – paid by self-employed people if they earn more than £6,515 per annum.
- Class 3 National Insurance – voluntary contributions to ensure there are no gaps in a National Insurance record.
- Class 4 National Insurance – paid by self-employed people with annual earnings of £9,569 or more.
How does National Insurance work for small businesses?
As an employer, you will need to make National Insurance deductions from your employees’ pay if they earn above the £184 per week (2021/22) threshold. Employers are responsible for collecting their employees’ National Insurance contributions, as well as Income Tax, and paying it to HMRC through the PAYE system. You can make National Insurance deductions through any payroll software you use, though some businesses do this manually.
Note – if you hire any employees who don’t earn enough to pay National Insurance but whose earnings exceed £120 a week (the Lower Earnings Limit), you will still need to report this information to HMRC, as it will mark the employees’ National Insurance record as ‘paid’ for that year and help protect their entitlement to the associated benefits.
What are national Insurance rates for businesses?
The amount you and your employees pay in Class 1 National Insurance contributions depends on your employees’ earnings. On GOV.UK you can find a handy summary of the weekly and monthly National Insurance thresholds, as well as how much National Insurance you might expect to pay.
When do you pay National Insurance?
You will need to report your employees’ National Insurance deductions to HMRC, as well as their pay and any benefits, either on their payday or before. Even if you pay HMRC on a quarterly basis, you should submit this information by the employees’ payday at the latest.
How to pay National Insurance
You can use your payroll software to send an FPS (Full Payment Submission) to HMRC. This includes key information such as your HMRC office number and employer PAYE reference, as well as employee details including their National Insurance number and payroll ID. On GOV.UK you can read more information about what information to report to HMRC, plus more details of how to pay National Insurance.
What does National Insurance pay for?
National Insurance payments are used for a range of public services, pensions and benefits, including the NHS, the Basic State Pension and Maternity Allowance. Read more on GOV.UK.
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This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.
Tyl by NatWest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.