National Insurance Contributions (NICs) is the second largest source of tax revenue in the UK, and when it changes, it can have a significant impact on the government’s finances, as well as the workers and businesses that pay it.
The current government has said that it won’t raise taxes for ‘working people’, with Labour’s manifesto promising not to increase the rates of income tax, National Insurance or VAT. No increases to workers’ National Insurance rates were announced in the Autumn Budget 2024. Instead, employers’ National Insurance went up from April 2025, with the rate increasing from 13.8% to 15%. At the same time, the threshold at which employers start paying NICs was lowered, dragging more staff into the taxable bracket. Find out what this may mean for employees and understand the previous National Insurance changes below.
» MORE: How National Insurance works
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National Insurance changes for employers
Employers are required to make separate National Insurance contributions on the earnings of their employees. These aren’t taken out of the employee’s pay, so it is an extra cost that many employers pay.
From 6 April 2025:
- the employers’ National Insurance rate went up from 13.8% to 15%
- the threshold that employers start paying National Insurance on an employee’s earnings fell from £9,100 to £5,000 a year
- the employment allowance has gone up from £5,000 to £10,500 a year – allowing organisations to claim back National Insurance up to the allowance limit
- the previous rule that employers with NICs liability of more than £100,000 per year could not claim the employment allowance has been scrapped.
Even though the government didn’t directly increase National Insurance rates for workers, plenty will likely still feel the effects. Many employers’ costs have risen because of the hike in National Insurance, and this could lead them to hire fewer people or offer lower pay increases than they would have done otherwise.
» MORE: 7 Tips to Help Small Businesses to Manage Rising Staff Costs
How will higher NICs for employers impact employees?
Employer NICs are not deducted from workers’ pay – the tax is paid directly from a company to the Government. The increase in the rate of employer NICs was announced in the autumn budget, putting more financial pressure on employers all over the country.
However, the bigger threat to businesses and the people they hire is the threshold at which employers’ NICs now become payable. Lowering the earnings threshold from £9,100 to £5,000 makes the tax applicable to more part-time workers, and those on lower incomes, whose earnings were previously excluded them from their employer’s NICs bill.
The hospitality sector may be disproportionately impacted by the changes to employers’ NICs, as industries heavily reliant on labour are particularly vulnerable to rising employment costs.
Due to the hours and nature of hospitality jobs, employers in this sector often attract younger workers and students, who could see their shifts cut, or worse – face redundancy.
“Hospitality is one of the very few sectors which provide routes into work for everyone. You don’t need a degree, you can work part-time,” said Allen Simpson, Deputy Chief Executive of trade body UK Hospitality.
Speaking to the BBC, Simpson said the people “being asked to pay most” to fix the government’s current economic struggles are part-time workers and people in their first job.
Previous National Insurance changes for workers
The main (Class 1) National Insurance rate paid by employees is 8%. This applies to all earnings, including tips for employees working in customer-facing roles.
The previous government did cut National Insurance rates for workers. The rate paid by workers was previously reduced from 12% to 10% in January 2024, then cut further to 8% in April 2024.
Self-employed Class 4 National Insurance contributions were also cut on 6 April 2024, with the rate decreasing from 9% to 6%.
Self-employed Class 2 National Insurance contributions were scrapped entirely in April 2024, a change that had been in the pipeline since 2015.
On the surface, these cuts in National Insurance are good for workers. But it’s not always easy to figure out exactly how tax cuts like this affect you.
Lower National Insurance contributions should mean you keep more of your earnings. However, it’s important to consider these cuts in the context of the ongoing freeze on personal tax thresholds, which is due to end in 2028. In her autumn budget in October 2024 and spring statement in March 2025, the Chancellor, Rachel Reeves, did not signal extending the freeze, nor bringing it forward.
As wages go up but income tax and National Insurance thresholds remain frozen, more people will be pulled into paying tax for the first time or tipped into higher tax bands. This is known as ‘fiscal drag’.
What are the National Insurance rates?
The amount you pay in National Insurance is determined by whether you are employed or self-employed, and how much you earn.
Employed
You do not pay National Insurance on the first £12,570 you earn.
Currently, the National Insurance rate for most employees is 8% on income of £12,570 to £50,270 a year (£1,048 to £4,189 a month).
A worker earning £35,000 per year can expect to pay £1,794 in Class 1 NICs.
The NICs rate is 2% for any income over £50,270 a year (over £4,189 a month). So, an employee earning a £55,000 per year salary will pay 8% NICs on earnings between £12,570 and £50,270, 2% on earnings above that, paying £3,110 NICs per year in total.
| Annual income | Class 1 NICs rate from 6 January to 5 April 2024 | Class 1 NICs from 6 April 2024 |
|---|---|---|
| £12,570-£50,270 | 10% | 8% |
| Above £50,270 | 2% | 2% |
Self-employed
If you are self-employed, your National Insurance contributions are calculated using your annual profits.
Previously, you paid Class 2 National Insurance contributions at £3.45 a week if your self-employed profits were £12,570 or more.
But from 6 April 2024, those with profits above £12,570 aren’t required to pay Class 2 National Insurance – and you still have access to contributory benefits such as the state pension. Those who make voluntary contributions can carry on doing so at £3.45 a week. For example, you might choose to make voluntary contributions to ensure you have enough qualifying years to claim the full state pension.
» MORE: 5 Personal Pension Tips for Self-Employed Workers
When it comes to Class 4 National Insurance contributions, you pay 6% on earnings between £12,570 and £50,270 and 2% on profits above £50,270.
| Annual profits | Class 4 NICs rate from 6 April 2025 |
|---|---|
| £12,570 to £50,270 | 6% |
| Above £50,270 | 2% |
Tax burden rising despite National Insurance cut
Despite employees paying a lower rate of NICs since April 2024, both lower and higher earners are set to lose out because of the impact of fiscal drag.
Analysis by investment platform Interactive Investor showed that those earning £20,000 will pay £282 more tax by April 2028, even with a £149 saving following the cut from 10% to 8%, because income tax thresholds aren’t rising with inflation. Those earning £100,000 will pay £2,445 extra in the same tax year. This is based on wage growth of 5.8% in March 2025 and inflation forecasts from the Office for Budgetary Responsibility.
Average earners on a salary of £35,000 could pay £845 more tax by 2028 according to Interactive Investor’s analysis.
Finally, keep in mind that frozen thresholds don’t just affect those in work. Since tax thresholds remain frozen, more pensioners are being dragged into paying income tax.
How can you mitigate the impact of fiscal drag?
Sarah Coles, Head of Personal Finance at investment platform Hargreaves Lansdown, said in an email to NerdWallet that it’s essential to make the most of every possible tax break. “This includes tax efficient savings and investments like ISAs and pensions, which lifts the tax burden [from saving for your future].”
Because personal allowances are frozen, and interest rates on cash savings accounts may be at their peak, more of us may be caught by having to pay tax on savings interest. That’s why it’s important to consider Individual Savings Accounts – or ISAs – as they give everybody a £20,000 tax-free savings allowance every tax year.
Paying into your pension will also usually attract some tax relief, helping you to reduce your tax burden and build your future pension pot.
Here are some tips to help you work out how much you can afford to save in your ISA or put into your pension in the new year:
- Work out your take-home pay. The table above will give you a rough estimate of the impact of National Insurance cuts on your take-home pay if you’re an employee. To achieve a more precise estimate of how much you’ll keep in January, you can find online calculators to work out your annual income and compare the prediction with your latest payslip.
- Calculate what’s left after essential spending. Then review your non-essential spending. This includes all your regular weekly, monthly and yearly outgoings, from music subscriptions to trips to the coffee shop. It will give you hard numbers related to where you may be overspending, and how much you could potentially save.
- The 50/30/20 rule. How you divide up your income is up to you, but a handy starting point for budgeting is to divide your take-home pay like this:
- 50% on ‘needs’ – essentials costssuch as rent, mortgage, bills and food
- 30% on ‘wants’ – luxuries and non-essential spending like meals out
- 20% on paying off debt and building up savings
- Spending priorities. Although this may not be for everyone, a good rule of thumb when prioritising your spending is:
1. Clear your ‘toxic debt’, such as payday loans or high interest credit cards.
2. Start an emergency fund that can cover unexpected expenses.
3. Contribute to your workplace pension scheme.
4. Continue to add to your emergency fund.
5. Pay off your remaining debts.
» MORE: Budgeting 101: how to make your money go further
Image source: Getty Images
