The NI System at a Glance
National Insurance Contributions (NICs) fund state benefits including the State Pension, statutory sick pay, and maternity allowance. The class of NI you pay depends on your employment status and earnings level. There are four active classes relevant to workers in 2026/27:
- Class 1: PAYE employees and their employers
- Class 2: abolished from April 2024 (voluntary contributions only)
- Class 3: voluntary, to fill gaps in NI record
- Class 4: self-employed workers on profits above £12,570
Class 1: PAYE Employees (2026/27)
Class 1 is deducted automatically from your payslip by your employer through PAYE. You never need to calculate or pay it directly.
| Earnings Band (annual) | Employee Rate | Annual Amount on £40k Salary |
|---|---|---|
| Up to £12,570 (Primary Threshold) | 0% | £0 |
| £12,571 – £50,270 (Upper Earnings Limit) | 8% | £2,216 (on £40k) |
| Above £50,270 | 2% | — |
There is also a Lower Earnings Limit of £6,396/year. If you earn between this and the Primary Threshold (£6,396–£12,570), you pay zero NI but still build up qualifying years for State Pension. This is a significant protection for part-time and low-paid workers.
Class 4: Self-Employed Workers (2026/27)
Class 4 is paid annually through your Self Assessment tax return. It is calculated on your net profits (income minus allowable expenses) from self-employment.
| Profit Band (annual) | Rate | Annual NI on £40k Profit |
|---|---|---|
| Up to £12,570 (Lower Profits Limit) | 0% | £0 |
| £12,571 – £50,270 (Upper Profits Limit) | 6% | £1,663 |
| Above £50,270 | 2% | — |
Self-employed pay less NI
Class 4 is charged at 6% vs employees' 8% — a 2 percentage point advantage. On £40,000 profit, self-employed pay approximately £553 less NI per year than an equivalent employee. However, they also receive no employer contribution and bear more administrative burden.
Class 2: Abolished from April 2024
Compulsory Class 2 NI (formerly a flat £3.45/week) was abolished from 6 April 2024. Self-employed people with profits above the Small Profits Threshold (£6,845 in 2026/27) now automatically receive qualifying years for State Pension without paying Class 2. Those with profits below £6,845 can still make voluntary Class 2 contributions at £3.50/week (2026/27) to protect their State Pension record.
Class 1 vs Class 4: Side-by-Side
| Feature | Class 1 (Employee) | Class 4 (Self-Employed) |
|---|---|---|
| Rate (main band) | 8% | 6% |
| Rate (above UEL/UPL) | 2% | 2% |
| Threshold (lower) | £12,570 | £12,570 |
| Threshold (upper) | £50,270 | £50,270 |
| Collection method | Monthly via payroll (PAYE) | Annually via Self Assessment |
| State Pension qualifying years | Yes | Yes (if profits >£6,845) |
| Salary sacrifice eligible? | Yes (saves 8% on sacrifice) | No (no employer scheme) |
| Employer also pays? | Yes — 15% employer NI | No employer contribution |
Worked Examples: Same Income, Different Status
£45,000 Salary (PAYE Employee) — Class 1 NI
£45,000 Profit (Self-Employed) — Class 4 NI
NI and State Pension: What You Need to Know
You need 35 qualifying years of NI contributions to receive the full new State Pension (£230.25/week in 2026/27 — subject to uprating). A minimum of 10 qualifying years gives you a partial State Pension. Qualifying years are built up from: Class 1 contributions, Class 4 contributions (if profits exceed £6,845), voluntary Class 2 or Class 3 contributions, or NI credits (e.g. if you're caring for a child under 12).
Employer NI: The Hidden Cost of Employment (2026/27)
On top of employee Class 1 NI, employers pay their own Class 1 secondary contributions at 15% on all employee earnings above the Secondary Threshold (£5,000/year in 2026/27). This means:
- For a £35,000 salary: employer pays 15% on £30,000 = £4,500 in employer NI
- Total employment cost to employer: £35,000 salary + £4,500 NI = £39,500
- Self-employed people bear no equivalent cost
Salary sacrifice pension contributions reduce the gross salary that employer NI is charged on — saving the employer NI too. Many employers pass on some or all of this saving to the employee's pension pot.
Sources
HMRC: Rates and Allowances — National Insurance Contributions 2026/27 · GOV.UK: Self-Employed NI rates · The Social Security (Contributions) Regulations 2026. For guidance only — not financial advice.