National Insurance: what you pay and why

What is National Insurance?

National Insurance (NI) was originally created to fund the state pension, NHS and certain benefits. It is collected through PAYE alongside income tax but calculated entirely separately — different thresholds, different rates, different rules.

• Employees pay Class 1 primary contributions. This is what appears on your payslip and what PayFluency models.
• Employers also pay Class 1 secondary contributions on top of your salary — at 15% on earnings above £5,000 per year. You never see this on your payslip, but it forms part of the true cost of employing you.
• NI applies only to employment earnings. It does not apply to pension income, savings interest, or rental income — only to income from employment or self-employment.

What are the 2026/27 employee NI rates?

Employee Class 1 NI uses two rates, applied to bands of earnings in the tax year:

Unlike income tax, there is no additional rate above a higher threshold. The rate simply drops at £50,270 and stays at 2% on everything above it.

Why does the rate drop above £50,270?

The Upper Earnings Limit (£50,270) is where the NI rate falls from 8% to 2%. This means someone earning £100,000 pays proportionally less NI on their upper income than someone earning £60,000 pays on the equivalent band. The rate structure effectively becomes less steep the more you earn above that boundary — the opposite of how income tax works, where the rate rises with income.

It also means the NI contribution to your overall marginal rate changes depending on where your income sits. Below £50,270, the NI contribution to your marginal rate is 8%. Above it, that contribution drops to 2%.

Here is what that looks like with real numbers, using the same scenario as the income tax bands guide:

The NI calculation on £62,100 adjusted income, step by step:

• £0 – £12,570: no NI
• £12,571 – £50,270: £37,700 at 8% = £3,016.00
• £50,271 – £62,100: £11,830 at 2% = £236.60
• Total annual NI: £3,252.60
• Monthly NI: £271.05

Notice that the upper band income (£11,830 above £50,270) generates only £236.60 in NI — because it is taxed at 2%, not 8%. If the same £11,830 had been in the main band, it would have generated £946.40. The rate drop is significant.

How is NI different from income tax?

The two systems are calculated separately and have several meaningful differences:

• Different thresholds. Both the primary threshold and the Upper Earnings Limit sit at different levels from income tax bands. They happen to share £12,570 as a lower threshold currently, but this is not structurally guaranteed.
• No equivalent of the Personal Allowance taper. There is no NI equivalent of the £100,000 income threshold that progressively withdraws a tax-free amount. NI has no such mechanism — the rates and thresholds are fixed regardless of total income.
• Only two rates above the threshold, not three. Income tax has basic, higher and additional rates. Employee NI has main and upper — and the upper rate is lower, not higher.
• NI applies only to employment income. Pension income, savings interest, dividends, and rental income do not attract employee NI. This is why the deductions picture changes at retirement — no employment income means no employee NI.
• RSU vests and bonuses attract NI as well as income tax. They are employment income — processed through payroll — so both systems apply. This is part of why the deduction rate on a vest can be higher than it first appears.

How does salary sacrifice affect NI?

Salary sacrifice reduces the earnings NI is calculated on — the same mechanism as for income tax. The sacrifice happens before both systems see the number. This is the key efficiency advantage over a personal pension contribution (relief at source), which comes from post-tax, post-NI income.

Using the same scenario, here is the NI comparison between 0% and 8% sacrifice:

The saving here is £108 a year — relatively modest — because both adjusted incomes (£62,100 and £67,500) sit above the Upper Earnings Limit of £50,270. The entire £5,400 sacrifice falls in the 2% band, so the NI saving is £5,400 × 2% = £108.

This saving is smaller than the income tax saving from sacrifice because the sacrificed amount falls in the 2% upper band — both income levels in this example sit above the £50,270 upper earnings limit. For someone earning below £50,270, the same sacrifice would save NI at 8%, making the combined tax and NI saving noticeably larger.

The picture is different when sacrifice moves income from below £50,270. If the same person earned £55,000 with 10% sacrifice, their adjusted income would drop from £55,000 to £49,500 — crossing the boundary. Part of the sacrifice would save NI at 8%, not just 2%, making the NI saving per pound sacrificed noticeably larger.

Either way, the NI saving from sacrifice is a saving that a personal pension contribution never delivers. Personal contributions are made from take-home pay after both income tax and NI have already been deducted.

What about employer NI?

Employers pay Class 1 secondary NI at 15% on employee earnings above £5,000 per year. This does not appear on your payslip — it is a separate cost paid directly by the employer on top of your salary. It does not reduce your take-home pay directly, but it forms part of the true cost of employing you and is a factor employers consider when structuring total compensation.

Salary sacrifice also reduces employer NI, because the sacrificed amount is no longer part of the earnings the employer pays secondary contributions on. Some employers pass part of their NI saving back into the employee’s pension as an additional employer contribution — the size and terms of this vary by employer and scheme.

The informed decision

Understanding NI as a separate system — with its own threshold, its own rates, and its own interaction with salary sacrifice — means you can read your payslip accurately and understand why your total deductions are the figure they are. It also clarifies why salary sacrifice is more efficient than contributing personally: sacrifice saves both income tax and NI, while a personal contribution saves only income tax.