National Insurance Explained: Allowances, Thresholds and How It Differs from Income Tax

Introduction

National Insurance (NI) is one of the most common sources of confusion for UK taxpayers. Many see it as “just another tax,” but in fact, NI is a separate contribution system that helps fund the State Pension, statutory sick pay, and other key benefits.

One of the most frequent questions we hear is:

👉 “Do I get the same personal allowance for NI as I do for Income Tax?”

The short answer: No. Your Income Tax allowance and your NI thresholds are completely separate — and that distinction can have a big impact on your take-home pay.

Who Pays National Insurance?

You pay NI if you are:

• An employee earning more than £242 per week from one job.

• Self-employed with annual profits above £12,570.

If you earn less but are above minimum thresholds, your record may still be “credited” to protect your entitlement to the State Pension.

You stop paying NI once you reach State Pension age — but note, for the self-employed this applies from the April after you reach that age.

National Insurance Numbers

Every individual has a National Insurance number (two letters, six numbers, and a final letter). This unique ID ensures your contributions and taxes are recorded against your name only, and it remains with you for life.

National Insurance Classes

NI comes in different “classes,” depending on your situation:

• Class 1 (employees): Deducted through PAYE if you earn over £242/week.

• Class 1A & 1B: Paid by employers on certain benefits or expenses.

• Class 2 (self-employed): Credited once profits exceed £6,845 (no payment needed, but record protected).

• Class 4 (self-employed): Paid on profits over £12,570.

• Class 3 (voluntary): Optional payments to cover gaps in your NI record.

NI Thresholds and Rates (2025/26)

For employees (Class 1):

• £0 – £242/week → 0%

• £242 – £967/week → 8%

• Over £967/week → 2%

For self-employed (Class 4):

• £0 – £12,570/year → 0%

• £12,570 – £50,270/year → 6%

• Over £50,270/year → 2%

Worked Examples

Example 1 – Earning £10,000 (employed)

• Income Tax: £0 (within £12,570 allowance)

• NI: £0 (below threshold)

✅ Take-home: £10,000

Example 2 – Earning £50,000 (employed)

• Income Tax: £7,486 (20% on taxable income above allowance)

• NI: £2,994 (8% on most earnings, 2% on the top slice)

• Total deductions: £10,480

✅ Take-home: ~£39,520

Example 3 – Earning £60,000 (employed)

• Income Tax: £11,432

• NI: £3,211

• Total deductions: £14,643

✅ Take-home: ~£45,357

Key Difference: Income Tax vs National Insurance

Income Tax Personal Allowance (£12,570): Covers your income before tax applies.

• National Insurance thresholds (starting around £12,570): Separate calculation, independent of Income Tax.

💡 They do not overlap. You don’t have a shared allowance — each is worked out separately.

This means that someone earning £50,000 will pay both Income Tax and NI, with each system applying its own rules.

Why This Matters

It’s easy to underestimate the impact of NI when calculating take-home pay. For higher earners, NI can add thousands to annual liabilities on top of Income Tax.

This is why many small business owners move from sole trader status into a limited company. With the right structure (salary + dividends), NI contributions can be reduced significantly, leading to real savings.

References & Further Insight 📘

This article is based on official HMRC guidance: National Insurance: introduction.

For related reading, see:

• [Sole Trader vs Limited Company: Which Is Better for £50,000 Profit?]

• [Capital Gains Tax: What You Need to Know for 2025/26]

Ready to Optimise Your NI and Tax? 🚀

Understanding NI is one thing — structuring your income to reduce it is another. With the right planning, you can avoid unnecessary costs and free up more money for your business or personal life.

👉 Book a call with our tax specialists today and let us show you how to make your money work harder.