National Insurance

Also called NI, NICs, National Insurance contributions

A second tax on earnings, paid by employees, employers and the self-employed under different classes and rules.

What it means

National Insurance is charged on earnings and profits. Employees pay Class 1 on their wages; employers pay a separate Class 1 secondary contribution on top; the self-employed pay Class 4 on profits and, historically, Class 2.

It builds entitlement to the State Pension and some other benefits, which is why the classes and thresholds matter beyond the bill.

Why it matters

Employer's NI is a real and often forgotten cost of employing people. It is also the main reason dividends are attractive to owner-directors: dividends carry no National Insurance at all.

For anyone deciding between employing someone and engaging a contractor, this is a large part of the arithmetic — and a large part of why HMRC cares about employment status.

What it looks like in practice

The Employment Allowance reduces employer's NI for eligible smaller employers; it is claimed, not automatic, and is worth checking every year.

Directors have an annual earnings period for NI, which is why director payroll is often set at a specific level. Your accountant will set it.

What to watch out for

Thresholds and rates change frequently, sometimes mid-year. Never plan on last year's figures.

Gaps in your own record. If you pay yourself below the lower earnings limit, you may not be building State Pension entitlement — check your record on GOV.UK.

Where to get proper advice

GOV.UK holds the current rates and the personal record. Your accountant sets the director's salary level and should revisit it each April.