UK National Insurance Contributions

The April 2025 employer NIC changes significantly increased UK payroll costs. The secondary Class 1 NIC rate rose from 13.8% to 15%, while the secondary threshold fell from £9,100 to £5,000 annually. For many employers, that translates into tens of thousands of pounds in additional payroll cost that never appears on employee payslips but directly impacts the employer’s cost base.

This post covers how employer NIC works across its main variants: Class 1 primary and secondary, Class 1A, director NIC, the Employment Allowance, and the salary sacrifice interaction, and how Intermezzo handles each through its API.

The NIC landscape

The main NIC classes are:

• Class 1 — the main payroll NIC, split into employee (primary) and employer (secondary) contributions.
• Class 1A — employer-only NIC on most benefits in kind, including company cars and private medical insurance.
• Class 1B — employer NIC on items covered by a PAYE Settlement Agreement (PSA).
• Class 2 and Class 4 — self-employed NIC, generally outside employer payroll.
• Class 3 — voluntary contributions paid by individuals to fill gaps in their National Insurance record and does not involve employers.

Class 1: primary and secondary contributions

Primary (employee) contributions

Employees pay primary Class 1 NIC at 8% on earnings between the primary threshold (£242 per week / £1,048 per month) and the upper earnings limit (£967 per week / £4,189 per month) for 2026/27. Earnings above the upper earnings limit attract a reduced rate of 2%.

There is also a lower earnings limit of £129 per week / £559 per month / £6,708 per year for 2026/27, below which no NIC is payable. Employees earning between the lower earnings limit and the primary threshold pay no NIC, but are treated as having paid, which means their National Insurance record accrues qualifying years for state pension without any deduction from pay. This distinction matters for the payroll engine: earnings in this band appear in the NIC register as subject to NIC but generate no deduction.

Employee NIC is calculated per pay period, not cumulatively across the year. If an employee's earnings fluctuate, they may pay NIC in some periods and not others, depending on whether earnings in that specific period exceed the primary threshold. This is different from PAYE, which uses a cumulative method.

Secondary (employer) contributions

Employers pay secondary Class 1 NIC at 15% on employee earnings above the secondary threshold of £96 per week. Unlike employee NIC, there is no upper ceiling — the 15% rate applies to all earnings above the threshold, however high.

The applicable weekly, monthly, four-weekly or annual threshold must be used according to the employee's pay frequency. For a weekly-paid employee in 2026/2027, it is £96/week; for monthly-paid employees, £417/month. 

NIC category letters

NIC category letters determine the applicable treatment:

• Category A — standard rate.
• Category B — reduced employee NIC for certain married women/widows; full employer NIC still applies.
• Category C — employees above State Pension age pay no employee NIC, but employer NIC still applies.
• Category H — apprentices under 25 receive a zero employer NIC rate up to the Upper Secondary Threshold, after which the standard employer rate applies.
• Category M — employees under 21 receive the same relief as apprentices.
• Category V — qualifying veterans receive a higher secondary threshold during their first year of civilian employment.
• Categories J, Z, and others — deferment and multi-employment scenarios.

Payroll systems should apply the correct category dynamically as employee circumstances change, including age thresholds, apprenticeship status, and State Pension age eligibility.

Class 1A and Class 1B

Class 1A NIC applies to most taxable benefits in kind and is currently reported annually via P11D(b). Under the planned mandatory payrolling regime from April 2027, most Class 1A liabilities are expected to move toward real-time in-payroll reporting and collection.

Some benefits including readily convertible assets and certain cash-equivalent awards attract Class 1 NIC instead of Class 1A and must be processed through payroll.

Class 1B NIC applies to benefits covered by a PAYE Settlement Agreement (PSA), where the employer settles tax liabilities on behalf of employees. The employer pays NIC on the grossed-up value of those items.

Correctly determining the NIC class for each benefit is essential before calculation begins.

Director NIC: the annual earnings period and its consequences

Directors are subject to an annual earnings period for NIC rather than the per-period basis that applies to regular employees. Under the annual earnings period method, a director's NIC is assessed against the annual secondary threshold across all payments made in the tax year, rather than against a weekly or monthly equivalent threshold for each pay run.

The practical consequence is that a director who receives no pay in the early part of the year and a large payment later will have a very different period-by-period NIC pattern than a regular employee on equivalent annual pay, but the same annual total. 

Employers can elect to use an alternative method, typically chosen where a director receives regular monthly pay and consistent period-by-period deductions are preferred. Under this method, NIC is calculated per period using monthly or weekly thresholds, with a year-end reconciliation that applies annual thresholds retrospectively. If the final payment is insufficient to cover any shortfall identified at reconciliation, the employer must make up the balance.

The payroll provider system must track which method applies to each director, apply it correctly through the year, and run the year-end reconciliation where the alternative method is used. 

The Employment Allowance 

Any UK employer that incurs a Class 1 secondary NIC liability can claim the Employment Allowance, provided they have at least one employee or at least two directors earning above the secondary threshold of £5,000 during the tax year. This includes sole traders, partnerships, limited companies, charities, and community amateur sports clubs. 

The Employment Allowance increased from £5,000 to £10,500 from April 2025, and the previous restriction that prevented employers with a Class 1 NIC liability of £100,000 or more in the prior tax year from claiming was also removed. Eligible employers offset up to £10,500 of their employer Class 1 NIC liability in the tax year, applied in-year through the payroll.

The eligibility rules have several specific exclusions that need to be checked within the system:

Single-director companies where the director is the only employee earning above the secondary threshold cannot claim. A company with one director and at least one other employee earning above £5,000 can claim; a company with only the director cannot.

Connected companies must share a single £10,500 allowance. Two companies are connected when one controls the other, or when both are controlled by a third party — typically through common control or majority ownership, which covers most group, subsidiary, and holding company structures. Where companies are connected at the start of the tax year, only one can claim the allowance; the companies choose which one and cannot split the allowance. Connection is determined at 6 April; a change during the year doesn't affect eligibility for that year.

Public sector bodies are excluded unless they are charities. Businesses where 50% or more of work is in the public sector are also excluded.

Domestic workers — nannies and similar — are excluded unless they're employed as carers or support workers.

The allowance applies only to Class 1 employer NIC. It does not reduce Class 1A or Class 1B liability.

A system that claims the Employment Allowance automatically without checking director-only status, connection, or sector will over-claim for ineligible employers. Over-claiming is an HMRC compliance failure; the employer is required to repay any excess.

Salary sacrifice and NIC

Salary sacrifice reduces contractual cash earnings before tax and NIC calculations, lowering both employee and employer NIC liability.

At the 2025 employer NIC rate, a £200 monthly pension salary sacrifice reduces employer NIC by £30 per month. Across a workforce, the savings can be substantial.

The order matters: salary sacrifice must be applied before NIC calculations run. Payroll systems must also preserve reference salary data to ensure post-sacrifice pay does not fall below National Minimum Wage requirements.

How Intermezzo Handles NIC for Your Platform

NIC category letter resolution runs per employee per period. Age-related transitions — under 21, apprentice under 25, state pension age — update the applicable category automatically based on the employee record, without requiring manual category changes. Veterans NIC relief applies correctly for the qualifying period. B and C category reduced rates apply without overriding employer liability.

Primary and secondary Class 1 NIC are calculated independently on the same earnings figure, with the correct thresholds, rates, and ceilings for each. The lower earnings limit band is correctly identified as subject to NIC but zero-deduction, ensuring the NIC register and employee record are accurate even where no deduction results.

Class 1, 1A, and 1B are routed separately. Benefits in kind route to Class 1A for standard benefits and to Class 1 for readily-convertible assets, with benefit classification determining the correct NIC treatment. Class 1B is tracked separately for PSA settlements. The mandatory payrolling transition for Class 1A from April 2027 moves Class 1A into the monthly payroll calculation without restructuring the benefit valuation logic.

Director NIC is handled under the annual earnings period by default, with the alternative method readily available. Year-end reconciliation runs automatically under the alternative method, with shortfall handling per HMRC requirements. Directors are identified at the employer level and tracked separately from regular employees for the NIC calculation.

Employment Allowance eligibility is assessed per employer. Single-director status, connected company relationships, sector classification, and domestic worker exclusions are evaluated before the allowance is applied. Connected companies that share a single allowance are configured at the group level; the allowance is applied to the designated entity only. The allowance offsets Class 1 liability in-year and is reported correctly on the EPS.

Salary sacrifice reduces pay subject to NIC at the correct point in the calculation pipeline: after gross earnings resolve but before NIC runs. The post-sacrifice figure is used for both employee and employer NIC. The pre-sacrifice reference salary is preserved immutably for National Minimum Wage validation.

Rates and thresholds are held in configuration with effective dating. The April 2025 changes — 15% rate, £5,000 secondary threshold, £10,500 Employment Allowance, removal of the £100,000 cap — applied without a deployment. If and when the secondary threshold increases (currently frozen until April 2031), the updates will apply via configuration to the correct tax year.

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