How Is National Insurance Calculated?

Part 1: Employees NI

When I started writing a blog post on National Insurance (NI) I initially addressed both employees and employers NI together. The further I got into the subject the more I realised employees and employers NI would work better split into two posts. This week we are going to look at employees NI, with part 2 coming next week when we look at employers NI.

What is the purpose of employees NI?

Before we look at how employees NI is calculated it’s worth understanding the purposes of NI.

What is National Insurance used for:

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

Who pays National Insurance?

If you are aged between 16 and SPA (State Pension age) you must pay NI if you are either:

  • An employee earning above £184/wk or £797/mth
  • Self-employed and making a profit of £6,515 or more a year

Even if you don’t pay employees NI because you don’t earn enough, if you do earn between £520 and £797/mth your contributions are treated as having been paid to protect your NI. This is because your earnings are within the Lower Earnings Level (LEL).

How much NI do you pay?

The amount of employees NI payable depends on your earnings and NI category letter. The majority of people will be category A, but this won’t always be the case. Below is a table which shows the different categories and percentages dependent on earnings.

Category letter£120 to £184 (£520 to £797 a month)£184.01 to £967 (£797.01 to £4,189 a month)Over £967 a week (£4,189 a month)
A0%12%2%
B0%5.85%2%
CN/AN/AN/A
H0%12%2%
J0%2%2%
M0%12%2%
Z0%2%2%
Source: HMRC

The National Insurance category you belong to will be displayed on your payslip. The table below outlines the different categories.  

Category letterEmployee group
AAll employees apart from those in groups B, C, J, H, M and Z in this table
BMarried women and widows entitled to pay reduced National Insurance
CEmployees over the State Pension age
JEmployees who can defer National Insurance because they’re already paying it in another job
HApprentice under 25
MEmployees under 21
ZEmployees under 21 who can defer National Insurance because they’re already paying it in another job
Source: HMRC

Your earnings in the pay period will be the final part in determining how much NI you pay. The table below outlines the different monthly thresholds. HMRC also has a weekly thresholds table.

21/22 Employee NI Monthly Thresholds

Earnings per month2021/2022 tax year
Lower Earnings Limit (LEL)
Employees do not pay National Insurance
but get the benefits of paying
£520
Primary Threshold (PT)
Employees start paying National Insurance
£797
Upper Accrual Point (UAP)
Employees with a contracted-out pension pay
a lower rate of National Insurance up to this point
N/A
Upper Earnings Limit (UEL)
All employees pay a lower rate of National Insurance
above this point
£4,189
Source: HMRC

Employee NI Calculation Examples

Using everything we have learnt so far it’s now time to work through a few examples. As category A is the most common NI category, I have used this for all three examples below. The same figures below would be applicable for category letters H & M as well due to the percentage rates being the same.

Example 1

Employee earning £1,000/mth

Using the monthly thresholds table above, earnings between £797/mth (Primary Threshold) – £4,189/mth (Upper Earnings Limit) are calculated at 12%, so the calculation is,

1,000 – 797 = £203 NI’able pay

12% of 203 = £24.36 employees NI

Example 2

Employee earning £4,500/mth

An employee earning £4,500/mth is spanning several NI thresholds, LEL to UEL. When we do the calculations, we need to determine the amount of earnings in each band.

LEL 0 – 797 = £797 @ 0% = £0 NI

PT – UEL 797 – 4,189 = £3,392 @ 12% = £407.04

UEL and above £4,189 to £4,500 = £311 @ 2% = 6.22

Total employees NI = £413.26

Example 3

Employee earning £600/mth

No employees NI would be due. This is because the employee is below the Primary Threshold of £797/mth. Nevertheless, as the employee is earning between £520 and £797/mth this falls within the Lower Earnings Limit which means the employee contributions are treated as having been paid to protect their NI.

What happens if you have more than one job?

As NI is calculated on a job-by-job basis, each job will be handled separately for NI purposes. This is different to income tax which is based on all earnings.

How is NI calculated if you are a director?

There are two methods of calculation for directors:

  • Standard, National Insurance is calculated on a year-to-date basis. The director doesn’t start paying NI until they breach the annual Primary Threshold (£9,568).
  • Alternative, National Insurance is calculated on pay for that period. When the last payroll of the tax year is processed there needs to be a calculation of NI for the tax year to see if more NI is due, which then needs deducting from the director’s final payment.

Summary

I hope this post has provided you with the tools to calculate your own NI, and more importantly to understand how the employees NI on your payslip is achieved each pay period.

Next week we will post the second part of the two part series on National Insurance, How Is National Insurance Calculated Part 2: Employers NI