What Is National Insurance for Business Owners?
National Insurance is a tax on earnings that funds state benefits. Learn the classes, rates, and how NI affects your costs as an employer and director.
Key Takeaways
- Employees pay Class 1 NI; employers pay an additional Employer's Class 1 NI on top
- Employer NI is currently 13.8% on earnings above £9,100 — rising to 15% from April 2025
- The Employment Allowance reduces Employer's NI by up to £5,000 per year for eligible businesses
- Self-employed individuals pay Class 4 NI on their profits through Self Assessment
What National Insurance is
National Insurance is a tax on earnings paid by employees, employers, and the self-employed. Contributions fund the National Health Service, state pension, and other benefits. For business owners, NI represents a significant employment cost beyond the headline salary — the total cost of employing someone is substantially more than their gross pay.
Class 1 employees and employers
Employees pay Class 1 NI at 8% on earnings between £12,570 and £50,270, and 2% above that. Employers pay Employer's Class 1 NIC at 13.8% on employee earnings above £9,100 per year — rising to 15% from April 2025. This employer contribution is a tax on employing someone, separate from and on top of the employee's own deduction. A £40,000 salary costs the employer approximately £44,500 or more in total employment cost.
Director salary strategy
Many limited company directors pay themselves a salary at or just above the NI threshold and take additional income as dividends — which attract lower tax rates and no National Insurance. A salary of £9,100-£12,570 typically captures the personal allowance while minimising NI. This requires careful planning: the company must have distributable profits to pay dividends, and dividend income is taxed at dividend rates. Always take professional advice before setting a director salary strategy.
Employment Allowance
The Employment Allowance reduces your total Employer's National Insurance bill by up to £5,000 per year. Most businesses are eligible. Exceptions include: companies where the sole employee is also a director, public sector bodies, and businesses with one employee who is also a director. Claimed through payroll software when submitting RTI filings. If you are eligible and not claiming it, you are overpaying HMRC.
Self-employed NI
Self-employed individuals pay Class 4 NIC on profits — 6% on profits between £12,570 and £50,270, and 2% above. Class 2 NIC (a flat weekly rate) was abolished from April 2024. Self-employed people with profits below the Lower Profits Limit may need voluntary Class 3 contributions to protect their state pension — check your NI record on the HMRC portal for any gaps.