Class 1 National Insurance: Rates, Thresholds and Category Letters

Employer contributions under Class 1 National Insurance are charged at 15% on earnings above the £5,000 Secondary Threshold from 6 April 2026, a rate that applies to every employer in the UK regardless of size ^[1]. Employees pay a separate primary contribution of 8% on earnings between the Primary Threshold of £12,570 and the Upper Earnings Limit of £50,270, and 2% on any earnings above that level ^[2].

Class 1 is the National Insurance class that runs through the payroll for every employed worker. Understanding the rates, the thresholds, the category letters that govern which rate applies, and the Employment Allowance that can offset part of the employer cost is a foundational requirement for anyone processing UK payroll.

Key takeaways

• Employer Class 1 NIC is 15% on earnings above £5,000 per year. Employee Class 1 NIC is 8% from £12,570 to £50,270, then 2%.
• The category letter assigned to each employee determines which rate structure applies. Category A is standard. Categories M, H, and V attract zero employer NI up to their relevant threshold.
• Employment Allowance allows eligible employers to reduce their secondary Class 1 NIC bill by up to £10,500 in the 2026-27 tax year.
• Class 1A is a separate employer-only charge on benefits in kind and certain termination awards.
• All Class 1 contributions are reported to HMRC through Real Time Information on the Full Payment Submission.

What Class 1 National Insurance covers

Class 1 National Insurance applies to employed earners: people who work under a contract of employment and whose earnings flow through the payroll ^[3]. It does not apply to self-employed individuals, who pay Class 4 through Self Assessment, or to directors of companies who are assessed separately on an annual earnings period basis.

Class 1 has two components that run simultaneously on every pay period. The primary contribution is deducted from the employee's gross pay. The secondary contribution is an additional cost borne entirely by the employer and does not reduce the employee's net pay ^[4]. Both are collected through the payroll and remitted to HMRC as part of the employer's PAYE payment.

Class 1 rates and thresholds for the 2026-27 tax year

The rates and thresholds below apply from 6 April 2026 to 5 April 2027. All figures are sourced from the HMRC NI Guidance for software developers, v1.0, January 2026 ^[5].

Employee (primary) contributions

LEL = Lower Earnings Limit. PT = Primary Threshold. UEL = Upper Earnings Limit.

Earnings between the LEL and the PT attract no employee contribution but are recorded on the payroll record, because they count towards the employee's qualifying year for the state pension ^[6].

Employer (secondary) contributions

ST = Secondary Threshold.

A notable feature of the employer threshold is that it sits well below the employee Primary Threshold. Employers therefore pay National Insurance on the band between £5,000 and £12,570 per year, earnings on which the employee pays nothing. This asymmetry is intentional and has been a feature of the system for many years ^[7].

Class 1A and Class 1B: the employer-only charges

Class 1 also covers two employer-only sub-classes that do not involve any employee deduction.

Class 1A is charged on benefits in kind provided to employees, such as company cars and private medical insurance, at 15% from 6 April 2026 ^[8]. It is also charged on termination awards exceeding £30,000 and on non-contractual sporting testimonials exceeding £100,000 ^[9]. Class 1A is reported annually on form P11D(b), due by 6 July following the end of the tax year.

Class 1B arises under a PAYE Settlement Agreement, a voluntary arrangement that allows employers to settle the tax and NIC on minor or irregular benefits on behalf of employees. It is also charged at 15% ^[10].

Category letters and how they change the employer rate

The category letter assigned to each employee determines which set of contribution rates applies to that individual's earnings. The letter is set by the employer at the point of onboarding based on the employee's circumstances and is included in every Full Payment Submission ^[11].

The most commonly used categories are:

Using the wrong category letter is a common payroll error. An employer paying an employee under 21 on category A, for example, pays employer NI unnecessarily on every pound above £5,000, when the correct category M would attract zero employer NI up to £50,270. HMRC Recognised payroll software that is integrated with the Moonworkers payroll API flags category mismatches at the employee-record level before the pay run is finalised ^[12].

Freeport and Investment Zone categories (F, I, S, L for Freeports; N, E, K, D for Investment Zones) offer zero employer NI up to £25,000 per year for eligible employees working 60% or more of their time in a designated special tax site. These are distinct schemes with separate legal bases and separate HMRC category letters, even though they share the same £25,000 threshold.

Employment Allowance and Class 1

Employment Allowance allows eligible employers to reduce their secondary Class 1 National Insurance liability by up to £10,500 in the 2026-27 tax year ^[13]. The allowance is set against the employer's monthly Class 1 secondary NIC payment until it is exhausted, effectively deferring and then eliminating that portion of the cost for smaller employers.

From the 2026-27 tax year, the allowance is no longer restricted to employers whose total Class 1 NIC liability in the previous year was below a set threshold. The eligibility change was introduced alongside the employer rate rise, providing a partial offset for qualifying businesses. However, the allowance is not available to companies where the only employee liable for secondary contributions is also a director ^[14]. Most sole-director companies therefore do not benefit.

The allowance is not granted automatically. Employers must claim it through their payroll software each tax year. The claim is made on the Employer Payment Summary submitted to HMRC.

The per-payslip pricing model used by Moonworkers means the Employment Allowance calculation is handled by the payroll engine, not manually by the employer. The Employer Payment Summary is generated automatically and the allowance offset is applied against the monthly HMRC payment without separate intervention.

For employers above the £3 million pay bill threshold, the Apprenticeship Levy runs as a 0.5% charge on the full pay bill alongside Class 1 NIC; that mechanism is explained in the guide to Apprenticeship Levy calculations. For employers managing pension contributions alongside NIC, the guide to auto-enrolment and workplace pensions covers how the two employer costs interact.

Class 1 and payroll software

Class 1 National Insurance is calculated using the exact percentage method, which applies the relevant rates to each earnings band in sequence ^[15]. Payroll software that holds HMRC Recognised status performs this calculation automatically, applies the correct category letter for each employee, handles the annual earnings period for directors, and reports the results on the Full Payment Submission under Real Time Information ^[16].

Errors in Class 1 calculations arise most commonly from three sources: an incorrect category letter, earnings not in the correct NI-able pay figure, and missed Employment Allowance claims. All three are preventable through systematic pre-pay-run validation. Platforms building on the Moonworkers API benefit from this validation at the engine level, so corrections happen before the FPS is filed rather than after.

Conclusion

Class 1 National Insurance is the largest NI cost in most UK payrolls and one of the most rule-bound. The combination of two separate contribution rates (employee and employer), a category letter system that changes the rate for several categories of worker, sub-classes for benefits and settlement agreements, and an Employment Allowance that qualifies some employers for a significant reduction, means that getting Class 1 right is a multi-step process every pay period. The reward for getting it right consistently is accurate HMRC remittances, correctly credited employee pension records, and FPS submissions that clear validation without amendment.

Frequently asked questions

What is the difference between Class 1 and Class 2 National Insurance?

Class 1 applies to employed workers and is deducted through the payroll by the employer ^[17]. Class 2 historically applied to self-employed individuals as a flat weekly charge, but it was effectively abolished as a separate payment from April 2024: self-employed individuals who earn above the Small Profits Threshold now receive Class 2 NIC credits through their Class 4 Self Assessment calculation rather than paying them separately. Employees cannot pay Class 2. The two classes operate in entirely separate parts of the system.

Does an employer pay National Insurance on an employee who earns below the Secondary Threshold?

No ^[18]. Employer secondary Class 1 NIC is only due on earnings above the Secondary Threshold, which is £5,000 per year (£417 per month, £96 per week) in the 2026-27 tax year. An employee whose total earnings in the pay period fall below the threshold in that period triggers no employer NIC for that period. This makes the Secondary Threshold a meaningful planning figure for employers deciding how to structure director-shareholder remuneration.

Can two employees at the same company be on different National Insurance category letters?

Yes, and this is normal ^[19]. Category letters reflect the individual circumstances of each employee. A standard employee aged 28 is category A. A colleague who is 19 is category M. An apprentice under 25 is category H. A former Armed Forces member in their first civilian job may be category V. Each correct letter triggers the corresponding rate structure, and assigning the wrong letter to any one of them creates either an overpayment or an underpayment of employer NIC.

Is Class 1A National Insurance the same as Class 1?

No ^[20]. Class 1 runs through the payroll on cash earnings and is paid jointly by employee and employer each pay period. Class 1A is an employer-only charge on benefits in kind, termination awards above £30,000, and sporting testimonials above £100,000. Class 1A is not deducted from the employee's pay. It is reported annually on form P11D(b) and paid by 22 July following the end of the tax year (19 July for cheque payments). The rate for both is 15% in the 2026-27 tax year.