National insurance (NI)
An employee pays national insurance (NI) contributions to qualify for certain State benefits, including statutory payments and the State pension. The amount the employee pays depends on their earnings and NI category letter. The employer also makes separate NI contributions on their behalf, which aren’t deducted from the employee’s pay.
There are two ways of calculating NI:
- Table method – This involves looking up employees’ pay in the appropriate HM Revenue & Customs (HMRC) manual.
- Exact percentage method – This uses the earnings limits and NI thresholds
Payroll uses the exact percentage method to automatically calculate NI.
If an employee’s NI isn’t calculating correctly, find out about the possible reasons.
You can find more information about the NI thresholds and employee and employer contributions for the current tax year (and previous tax years) on the HMRC website.
Every employee needs a NI number and is a unique reference code assigned by HMRC. The employee’s record of NI contributions is identified using this number.
If an employee can’t give you their NI number when you set up their employee record, leave this box blank. Payroll automatically includes a National Insurance verification request (NVR) in the next FPS submission to HMRC.
HMRC will respond to this with a NVR response, which gives you the information you need. If you receive a NVR response, this appears at the top of the relevant employee’s record.
The employee’s NI category determines the NI rates and bands to use in calculations of both employee and employer NI contributions. The most common NI category is A.
The following NI categories are supported by Payroll:
|A||Standard rate contributions
This is the most common NI category.
It is used for all employees under State pension age who aren’t in a contracted pension scheme.
|B||Reduced rate contributions
Used for married women or widows who hold form CA4139, CF383 or CF3804, and who aren’t in a contracted pension scheme.
Used for employees over the State retirement age who hold form CA4140 or CF384.
The employee can get these forms from HMRC, or from the Pension Service. Alternatively, they can provide the employer with proof of their date of birth, such as their birth certificate or passport.
Used for employees with more than one job, where they’ve already reached the Upper Earnings Limit (UEL) for NI in their other job.
This entitles them to defer their contributions and pay NI at 2% on all earnings above the UEL.
The employee needs to obtain form CA2700 before you can assign them this NI category.
|H||Apprentices under 25|
|M||Standard rate contributions – under 21
Used for employees under 21 years old for standard NI contributions.
|Z||Reduced rate contributions – under 21
Used for employees under 21 years old for reduced rate NI contributions for a second job.
If category X is referenced on an employee’s P11, this is because their total NI contributions for the pay run are zero, with their earnings in the pay run below the LEL threshold, or if the only payment made is a pension payment.
Similarly, if category X is referenced on an employee’s P60, their total NI contributions for the tax year are zero, with their earnings below the LEL threshold in every pay run, or if the only payments made were pension payments.