ch5: national insurance

class 1 employee NIC

deducted by the employer

paid by employee on earnings

What are the types of National Insurance

• Class 1 (Employee) → paid by employee on earnings

• Class 1 (Employer) → paid by employer on earnings

• Class 1A → paid by employer on benefits (15%)

What is included in earnings for NIC?

• Salary / wages (cash earnings)

• Most benefits (for employer NIC)

• Vouchers (treated as cash)

not included

• Reimbursed business expenses

• Exempt income (same as income tax rules)

How is employee NIC calculated (2025/26)?

• £0 – £12,570 → 0%

• £12,571 – £50,270 → 8%

• Above £50,270 → 2%

Formula:
(Main band × 8%) + (Excess × 2%)

How is employer NIC calculated?

• £0 – £5,000 → 0%

• Above £5,000 → 15%

Formula:
(Total earnings – £5,000) × 15%

What is the employment allowance?

• Employer can deduct £10,500 from total NIC bill

• Applies to employer NIC only

• Reduces overall liability (not per employee)

What is Class 1A NIC?

• Paid by employer on benefits in kind

• Rate = 15%

• Employee does NOT pay this

Formula:
Benefits × 15%

vouchers are subject to class ___ employee and employer NIC, as they deemed as cash equivalent

1

Key rules to remember for NIC?

• Use cash earnings only for Class 1

• Ignore reimbursed expenses

• Employee + Employer NIC calculated separately

• Class 1A = benefits only

• Same income figure used for both employee & employer NIC

What is an earnings period for NIC?

• Weekly paid → weekly thresholds

• Monthly paid → monthly thresholds

• Exam default → usually annual basis unless told otherwise

What are the key NIC thresholds (2025/26)?

Employee:

• £12,570 (annual threshold)

• £50,270 (UEL)

Employer:

• £5,000 threshold

👉 Monthly equivalents:

• £1,048 (employee threshold)

• £4,189 (UEL)

• £417 (employer threshold)

When do you use annual vs monthly/weekly NIC?

• Normal employees:
  → Use pay period basis (monthly/weekly)

• Exam shortcut:
  → Use annual unless question says otherwise

How is NIC calculated for directors?

ALWAYS use ANNUAL earnings basis

• Combine total income for the year

• Apply thresholds once

• Prevents manipulation of timing

How are bonuses treated in NIC?

• Employees (monthly method):
  → Bonus taxed in that specific month
  → Can push income into higher band (2%)

• Directors:
  → Bonus included in total annual earnings

Why does earnings period affect NIC?

• Monthly spikes (e.g. bonus)
  → Can trigger 2% rate earlier

• Annual method smooths income
  → Often gives lower NIC

What is the employment allowance?

• Deduct up to £10,500 from employer NIC

• Applies to total employer liability (not per employee)

• Some employers are excluded

What is Class 1A National Insurance?

• Paid by employer only

• On non-cash benefits (benefits in kind)

• Additional cost to employer

Examples: car, accommodation, medical insurance

What counts as benefits for NIC?

• Non-cash benefits provided by employer

• Use cash equivalent value (same as income tax)

Are reimbursed expenses subject to NIC?

• NIC if genuine business expense

• NIC applies if it’s a private expense

Key idea:
Business = no NIC
Private = NIC

How is mileage treated for NIC?

• Up to 45p per mile → NO NIC

• Above 45p → Excess is taxable for NIC

Formula:
(Actual – 45p limit) = NIC amount

Why might employees prefer benefits over salary?

• Salary → subject to Class 1 NIC (employee + employer)

• Benefits → subject to Class 1A only (employer only)

Employee saves NIC

What are the key NIC rules to remember?

• Class 1 → salary

• Class 1A → benefits

• Employer pays more NIC than employee

• Directors → annual basis

• Mileage: 45p limit

• Business expenses → no NIC