National Insurance
National Insurance is a charge on earnings that also builds entitlement to the state pension and certain benefits. Employees pay 8% between £12,570 and £50,270 and 2% above that; dividends carry none.
Also known as: NIC, National Insurance contributions
How it works
Employees and directors pay Class 1 primary contributions through PAYE: 8% on earnings between the primary threshold of £12,570 and the upper earnings limit of £50,270, then 2% on everything above. The company pays secondary contributions at 15% on earnings above £5,000, with no upper limit.
Directors are assessed on an annual earnings period rather than a weekly or monthly one, so contributions can appear unevenly across the year in payroll software. That is normal and the annual total is what matters.
Self-employed people pay Class 4 at 6% and 2% on profits, with Class 2 voluntary at £3.50 a week for those below the small profits threshold who want to protect their record. Dividends are outside National Insurance entirely, which is the main reason a small salary and dividends has been the standard extraction route for owner-managed companies — although the dividend rate increases from April 2026 have narrowed the gap.
Contributions matter beyond tax. A qualifying year requires earnings at or above the lower earnings limit of £6,500, and you generally need 35 qualifying years for a full new state pension. Setting a director's salary below that level saves a little tax and quietly costs a pension year.
Who this affects
- Directors choosing a salary level that protects a qualifying year
- Employers budgeting the true cost of a hire
- Shareholders comparing dividends, which carry no National Insurance, with salary
- Directors of more than one company, where thresholds are not duplicated in the way people expect
Common mistakes
- Setting a salary below £6,500 and losing a state pension year
- Assuming National Insurance is deductible from your own income tax bill
- Overlooking employer contributions when pricing work or a salary offer
Frequently asked questions
What are the National Insurance rates for employees?
8% on earnings between £12,570 and £50,270, then 2% above the upper earnings limit.
Do I pay National Insurance on dividends?
No. Dividends are a distribution of company profit and carry income tax at dividend rates only.
What salary gives me a qualifying year?
Earnings at or above the lower earnings limit of £6,500 for the year create a qualifying year, even where no contributions are actually payable.
Why is my director's National Insurance uneven month to month?
Directors use an annual earnings period, so thresholds are applied cumulatively across the year rather than evenly each month.
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Reviewed by Waqas Sagar ACA FCCA FMAAT · Last reviewed 13 September 2026 · Figures for 2026/27 · About our practice
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