National Insurance Contributions Explained: Rates, Thresholds and How BrightPay Calculates NIC Automatically

National Insurance Contributions are the second-largest source of UK government tax revenue. They fund the National Health Service, the state pension, and a range of contributory benefits. For employers and their accountants, NIC is a significant overhead — the rate increase to 15% in April 2025 added materially to employment costs for most businesses — and a compliance obligation that must be calculated correctly on every payroll run.

Understanding how NIC works in practice, and how payroll software handles the complexity, is essential knowledge for any accountant or bureau manager processing UK payroll.

Class 1 NIC: The Core Payroll Calculation

The National Insurance contributions that appear in most payroll runs are Class 1 contributions. These are split between the employee and the employer.

Employee (Primary) Class 1 NIC is deducted from the employee’s gross pay. For 2026/27, the rates are:

• 8% on weekly earnings between the Primary Threshold (£242 per week / £12,570 per year) and the Upper Earnings Limit (£967 per week / £50,270 per year)

• 2% on earnings above the Upper Earnings Limit

Employees earning below the Primary Threshold pay no NIC, but those earning above the Lower Earnings Limit (£125 per week / £6,500 per year) still accrue a NIC record, which protects their entitlement to the state pension and contributory benefits without any actual deduction.

Employer (Secondary) Class 1 NIC is paid by the employer on top of gross wages. It does not come out of the employee’s pay. For 2026/27, the rate is:

• 15% on weekly earnings above the Secondary Threshold (£96 per week / £5,000 per year)

The Secondary Threshold was reduced from £9,100 to £5,000 in April 2025, substantially increasing the employer NIC liability on lower-paid and part-time workers. An employer paying someone £20,000 per year now pays 15% on £15,000 — a liability of £2,250 — compared to 13.8% on £10,900 previously. The combined effect of the rate increase and threshold reduction represents one of the most significant increases in employment costs in recent years.

The Employment Allowance

Eligible employers can reduce their annual employer Class 1 NIC liability by up to £10,500 through the Employment Allowance. This was increased from £5,000 in April 2025. From April 2025, the previous restriction excluding employers with a prior-year employer NIC liability above £100,000 was removed, meaning most UK employers — including larger ones — can now claim.

The Employment Allowance must be claimed through the payroll RTI submissions. It reduces the employer NIC due across the year, with the allowance applied against each payment until it is exhausted. The claim is made via the Employer Payment Summary in the RTI process.

NIC for Different Employee Categories

Not all employees are subject to standard Class 1 NIC rates. Several categories attract different employer NIC treatment:

Employees under 21. Employer NIC is charged at 0% on earnings up to the Upper Secondary Threshold for under-21s (currently £50,270 per year). This zero rate was introduced to reduce the cost of employing young workers. Standard employee NIC still applies.

Apprentices under 25. The same 0% employer NIC rate applies on earnings up to the Apprentice Upper Secondary Threshold for apprentices under the age of 25.

Employees over State Pension age. Employees who have reached State Pension age pay no employee Class 1 NIC, regardless of their earnings. Employer NIC continues to apply as normal.

Veterans in their first year of civilian employment. A zero-rate employer NIC applies on earnings up to the Veterans Upper Secondary Threshold for qualifying veteran employees in their first year of civilian employment.

Applying the correct category to each employee matters. An employer who charges standard employer NIC on an under-21 employee overpays; one who incorrectly applies a zero rate to an employee who does not qualify underpays and risks an HMRC compliance notice.

Directing NIC: The Annual Method

Directors of limited companies who are also employees have their NIC calculated on an annual basis rather than period by period. This is because director remuneration is often irregular — a low salary with large dividends, or a variable draw across the year — and the cumulative annual method prevents both over-deduction (if the director takes most of their salary in one period) and under-deduction.

Under the annual method, the director’s NIC liability for the year is calculated based on their total earnings to date compared to the annual thresholds. This is recalculated at each pay period, with the cumulative liability adjusted. It means that a director taking salary monthly at £12,570 per year — below the Primary Threshold — pays no employee NIC; one who takes a large salary payment in a single month may have NIC calculated differently than a standard employee would.

Payroll software must correctly identify directors and apply the annual cumulative method. Incorrect treatment — applying the regular period-based method to a director — generates errors that compound across the year and require correction via an earlier year update.

How BrightPay Handles NIC Calculations

BrightPay calculates National Insurance automatically for every employee on every payroll run, applying the correct rate, threshold and method based on each employee’s category and pay period. Key features of BrightPay’s NIC handling include:

Automatic rate and threshold updates. At the start of each tax year, BrightPay is updated with the current Class 1 rates and thresholds for both employee and employer NIC, as well as all Upper Secondary Thresholds for different employee categories. Mid-year changes — if HMRC announces adjustments — are applied in the same way. The bureau does not need to manually update rate tables across each employer.

Employee category flags. BrightPay allows each employee record to be flagged with the appropriate NIC category — A (standard), B (married woman’s reduced rate), C (over State Pension age), H (apprentice under 25), M (under 21), and others — so the correct rate is applied automatically for each pay period.

Director NIC using the annual method. Directors in BrightPay are identified as such in their employee record. The system calculates NIC on a cumulative annual basis, automatically recalculating the liability at each pay run based on total earnings to date.

Employment Allowance tracking. BrightPay tracks the Employment Allowance claimed and applied across the year, reducing the employer NIC due in each period until the allowance is exhausted, and including the claim in the relevant RTI submissions.

The combination of automatic rate application, category-specific NIC treatment, and built-in Employment Allowance management means that NIC accuracy for BrightPay users depends on correct employee set-up rather than manual rate management — a much lower-risk position than maintaining NIC rates across a spreadsheet or unautomated system.

Frequently Asked Questions

This content may have been developed with the assistance of AI tools. Content is reviewed by a member of the Bright team before publication. Guidance on legislation can be obtained from your industry body.