Work out your take-home pay
Income tax, National Insurance and net pay for any UK salary, 2026-27.
National Insurance is not charged on the pension income a retiree draws, and an employee who reaches State Pension age usually stops paying it even while still working [1] [25]. At the other end of working life, 7.7 million employees use salary sacrifice to pay into a pension and save National Insurance on those contributions, a saving the government will cap at £2,000 a year from 6 April 2029 [5].
The question "is National Insurance paid on a pension?" therefore has several answers, depending on whether the money is going into a pension or coming out of one, who is paying, and the age of the person concerned. For payroll teams, each answer translates into a specific setting: a category letter, a pension deduction method, or a salary sacrifice arrangement that changes the National Insurance base.
This guide sets out how National Insurance interacts with pensions at every stage. It covers pension income, the State Pension age rules, employee and employer contributions, net pay and relief at source, salary sacrifice and the 2029 reform, and the way National Insurance builds entitlement to the State Pension in the first place. It is written for employers, payroll administrators, and the accountants and bureaux that run payroll on their behalf.
Key takeaways
- Pension income, including the State Pension and private or workplace pensions in payment, is taxed but does not attract National Insurance [16] [25].
- Employees over State Pension age move to category letter C: they pay no employee National Insurance, but the employer still pays employer contributions [3] [7].
- Employee pension contributions taken under a net pay arrangement or relief at source do not reduce National Insurance, because NICs are assessed on gross earnings before pension deductions [8].
- Employer pension contributions are free of National Insurance, and salary sacrifice converts employee contributions into employer ones [6] [15].
- From 6 April 2029, only the first £2,000 a year of pension contributions made through salary sacrifice will be exempt from National Insurance [6].
National Insurance on pension income
The starting point is the pension once it is in payment. Income from pensions, including the State Pension, is usually subject to Income Tax, but National Insurance is a charge on earnings from work, not on retirement income [16] [19].
The State Pension and private pensions in payment
HMRC lists the State Pension, private pensions and earnings from employment or self-employment as the components of total taxable income for a retiree [24]. Income Tax applies only where that total exceeds the tax-free allowances, and the Personal Allowance for the 2026-27 tax year is £12,570 [2] [28].
National Insurance, by contrast, is not deducted from pension income, whether the pension comes from the state, a workplace scheme or a personal pension [25] [19]. A pensioner who receives an occupational pension through the former employer's payroll therefore sees Income Tax under PAYE on the payslip, but no National Insurance line.
The table below summarises how the main types of retirement income are treated.
| Type of income | Income Tax | National Insurance |
|---|---|---|
| New State Pension (full rate £241.30 a week) [12] | Yes, as part of total income [16] | No |
| Workplace or personal pension in payment | Yes, usually through PAYE [24] | No [25] |
| 25% tax-free lump sum (up to £268,275) [17] | No | No |
| Earnings from a job after State Pension age | Yes | Employer only [3] |
Lump sums and drawdown
Most people can take up to 25% of the amount built up in a pension as a tax-free lump sum, with a maximum of £268,275 [17]. The rest is taxed as income when it is drawn, and HMRC warns that early-access offers can lead to tax of up to 55% [20].
Small pots follow the same logic. A pension worth up to £10,000 can usually be taken in one go, with 25% of it tax-free [17]. None of these withdrawals carries National Insurance, because they are pension benefits rather than earnings from an employment [25].
Paying a company pension through payroll
Some employers pay a pension directly to former staff through their own PAYE scheme. HMRC requires specific reporting on the Full Payment Submission when a retiring employee starts to receive a company pension [3]. The payroll applies a tax code to the pension but no National Insurance, which is why pensioner payrolls are normally run as a separate payroll or flagged as pension payments in HMRC-recognised UK payroll software [25].
Working past State Pension age
The second scenario is the employee who keeps working after reaching State Pension age. GOV.UK states that most people stop paying National Insurance at that point, even when still working [1] [2].
Employee contributions stop, employer contributions continue
HMRC's National Insurance Manual is explicit: primary Class 1 contributions are not payable by anyone over State Pension age, but employers remain liable for secondary Class 1 contributions [7]. The employee saves the 8% main rate and the 2% upper rate, while the employer continues to pay 15% on earnings above the Secondary Threshold, set at £5,000 a year for the 2026-27 tax year, [27] [4].
The calculator engine shows the effect for a monthly salary of £2,500 in England. On category A, the employee pays £116.16 of National Insurance and takes home £2,093.64. On category C, employee National Insurance falls to £0 and take-home pay rises to £2,209.80, while employer National Insurance stays at £312.45 in both cases [3] [7].
Over a full year, the same pattern holds. An employee earning £30,000 a year pays £1,394.40 of employee National Insurance on category A and £0 on category C, while the employer pays £3,750 on both letters and Income Tax stays at £3,484.20 [4] [28].
Changing the category letter to C
When an employee reaches State Pension age, the employer changes the National Insurance category letter to C in the payroll software [3]. HMRC asks employers to carry on reporting year-to-date information under the old letter until the end of the tax year, so a single tax year can show two letters for the same employee [3].
The letter depends on the scheme the employer operates. The table below shows the over-State-Pension-age letters set out by HMRC.
Employers who want the wider context on employer contributions can read the Moonworkers guide to employer National Insurance.
Proof of age and timing
The employee normally proves State Pension age with a birth certificate or passport [1]. An employee who prefers not to show those documents can ask HMRC for a letter confirming that State Pension age has been reached and no National Insurance is payable [1]. HMRC also accepts a certificate of age exception (CA4140) already held, although these certificates are no longer being issued [3].
Timing matters at the boundary. Primary Class 1 contributions remain due on earnings paid after State Pension age if those earnings should have been paid before it, which catches late-paid bonuses and arrears [7]. The State Pension age itself is checked with the GOV.UK tool, which notes that the age is regularly reviewed and that the old default retirement age of 65 no longer exists [14].
The self-employed after State Pension age
Self-employed people follow a different calendar. They stop paying Class 4 contributions from 6 April after reaching State Pension age, so someone who reaches that age on 6 September 2026 stops paying Class 4 from 6 April 2027, with the final bill due on 31 January 2028 [1] [2]. Directors and sole traders who also draw a salary need both rules applied correctly.
National Insurance on pension contributions
The third scenario is money going into a pension while the employee is still of working age. Here the method of contribution decides whether National Insurance is saved.
Employee contributions: no National Insurance relief
HMRC's National Insurance Manual states that NICs must be assessed on gross earnings before the deduction of any pension contributions, and that there is no equivalent National Insurance relief [8]. That rule applies whether or not the employer uses a net pay arrangement and whether or not the scheme is registered [8].
In practice, pension contributions reduce Income Tax but leave National Insurance untouched. Under auto-enrolment, the minimum contribution is 8% of qualifying earnings between £6,240 and £50,270 a year, of which at least 3% comes from the employer, and none of the employee's share reduces the National Insurance base [29] [8].
Net pay arrangement and relief at source
The two methods of giving tax relief treat the payslip differently. Under a net pay arrangement, the employer takes the contribution from pay before tax is calculated, so full tax relief is received up front [9] [20]. Under relief at source, the employer takes the contribution after Income Tax and National Insurance, and the pension provider claims basic-rate relief from HMRC [20].
| Method | When the contribution is taken | Effect on Income Tax | Effect on National Insurance |
|---|---|---|---|
| Net pay arrangement | Before tax [9] | Relief given through payroll | None [8] |
| Relief at source | After tax and NI [20] | Provider claims basic rate | None [8] |
| Salary sacrifice | Before tax and NI [15] | Lower taxable pay | Lower NI for both parties [15] |
A worked example makes the difference concrete. For an employee earning £30,000 a year who pays £1,500 into a net pay scheme, the engine gives Income Tax of £3,184.20 on taxable pay of £28,500, against £3,484.20 without the pension, a saving of £300. Employee National Insurance remains £1,394.40, calculated on the full £30,000 [8] [9].
Low earners in net pay schemes are a known edge case. From the 2024 to 2025 tax year onwards, the low earner's pension payment compensates members who miss out on relief because they earn below the Personal Allowance, and HMRC contacts those members directly [9].
Employer contributions are free of National Insurance
Employer contributions to a registered pension scheme are not earnings for National Insurance. The Treasury's guidance on the 2029 reform confirms that employer pension contributions remain free of NICs [6], and HMRC's manual separately disregards employer payments into an employer-financed pension only scheme in the calculation of Class 1 earnings [21].
This is the foundation of salary sacrifice. HMRC's own example of a £5,000 bonus exchanged for a £5,000 employer contribution to a registered pension scheme produces no employment income tax or National Insurance charge for the employee [15].
Salary sacrifice and the 2029 National Insurance cap
Salary sacrifice is the only route by which pension saving reduces National Insurance today. It is also the route the government has chosen to restrict.
How salary sacrifice saves National Insurance
Under salary sacrifice, the employee gives up part of contractual salary and the employer pays the same amount into the pension. Salary sacrifice reduces the cash earnings on which National Insurance is charged, and the sacrifice must not take the employee's cash pay below the National Minimum Wage [15].
The engine shows the size of the saving. An employee on £40,000 a year who sacrifices £4,000 has cash pay of £36,000. Employee National Insurance falls from £2,194.40 to £1,874.40, a saving of £320, and employer National Insurance falls from £5,250 to £4,650, a saving of £600 [15] [27]. Income Tax falls by £800 at the same time.
What changes from 6 April 2029
From April 2029, only the first £2,000 of employee pension contributions made through salary sacrifice each year will be exempt from National Insurance [6]. Sacrificed amounts above £2,000 will attract both employee and employer Class 1 contributions, while the Income Tax treatment stays the same [5].
HMRC's impact assessment gives the scale of the change in the table below.
Applied to the £40,000 employee sacrificing £4,000, National Insurance would be charged as if cash pay were £38,000 once the cap applies. On 2026-27 rates, the engine puts employee National Insurance at £2,034.40 and employer National Insurance at £4,950 on that base, so the cap would claw back £160 of the employee saving and £300 of the employer saving [6] [27]. Rates in 2029-30 may differ, so the figure illustrates the mechanism rather than a forecast.
What the reform means for payroll
Employers will need to report the total amount sacrificed through existing payroll software, and HMRC will publish further guidance on GOV.UK before April 2029 [6]. That implies a new data item: payroll systems will have to track cumulative sacrifice per employee across the tax year and switch National Insurance back on once £2,000 is passed [5].
Bureaux running salary sacrifice for many clients will feel the change first. A multi-client payroll dashboard that already holds sacrifice amounts per employee makes the cap a configuration change rather than a manual reconciliation. Platforms that embed payroll through an HMRC-recognised payroll API will need the same cumulative logic exposed as a field, so HR and benefits tools can show employees the effect before they commit.
How National Insurance builds the State Pension
The final link between National Insurance and pensions is entitlement. National Insurance contributions and credits are what qualify a person for the State Pension in the first place.
Qualifying years
A person needs 10 qualifying years on the National Insurance record to get any new State Pension, and 35 qualifying years for the full rate where the record started after April 2016 [13]. The full rate of the new State Pension is £241.30 a week, and it rises each year by the highest of earnings growth, prices or 2.5% [12] [13].
Employees earning between £129 and £242 a week usually pay no National Insurance but still receive credit towards benefits, because their pay sits between the Lower Earnings Limit and the Primary Threshold [19]. HMRC's rates table starts the employee bands at £129 a week [27], the Lower Earnings Limit, equivalent to £6,708 a year for the 2026-27 tax year, which is the level an employer's payroll must report even when no contributions are due.
Credits and voluntary contributions
Gaps can be filled in two ways. National Insurance credits cover periods such as unemployment, illness or caring, and Class 3 credits count towards the State Pension only [18]. Voluntary contributions can also be paid, at £18.40 a week for Class 3 and £3.65 a week for Class 2 in the 2026-27 tax year [11].
The table below compares the main ways a year becomes a qualifying year.
| Route | Who it applies to | Counts towards |
|---|---|---|
| Class 1 contributions through payroll | Employees above the Primary Threshold [19] | State Pension and other benefits |
| Earnings between LEL and PT | Employees earning £129 to £242 a week [19] | Treated as paid |
| Class 3 credits | Eligible carers, claimants and others [18] | State Pension only |
| Voluntary Class 3 | Anyone with eligible gaps [10] | State Pension only |
Employees can see their record, including gaps and whether a year counts as qualifying, through the GOV.UK service [22]. Statements cannot be requested for the current or previous tax year, so payroll accuracy matters: a wrong category letter or missing Lower Earnings Limit reporting can leave a year incomplete [22] [10].
Deferring the State Pension while working
An employee who keeps working beyond State Pension age does not have to claim the State Pension. If it is not claimed, it defers automatically, and the extra amount built up can be taken as a lump sum or as a higher weekly pension [23]. Any extra payment from deferral may be taxed, but, like the State Pension itself, it carries no National Insurance [23] [25].
A payroll checklist for pensions and National Insurance
The rules above translate into a short list of checks a payroll team can run before each pay period. The checklist applies to small employers running their own payroll for SMEs as much as to bureaux.
- Hold date of birth for every employee and diarise State Pension age, so the category letter moves to C in the right pay period [3].
- Keep year-to-date figures under the old letter until 5 April after the change [3].
- Confirm whether each pension scheme uses net pay or relief at source, and never reduce National Insurance pay for employee contributions [8].
- For salary sacrifice, check that cash pay stays above the National Minimum Wage after the sacrifice [15].
- Start recording cumulative sacrifice per employee now, so the 6 April 2029 cap can be applied without rebuilding history [6].
- Run pensioner payments through a pension payroll with tax but no National Insurance, and report them correctly on the FPS [3].
Developers integrating these rules can find the relevant fields in the Moonworkers API documentation, and the wider auto-enrolment picture is covered in the guide to auto-enrolment.
Check the National Insurance effect on any salary
The quickest way to see how a category letter or a salary sacrifice changes the numbers is to run the salary through the Moonworkers UK salary calculator, which applies the 2026-27 PAYE and National Insurance rules to any gross pay.
£ per month
e.g. 1257L, S1257L, BR, D0
S = Scotland · C = Wales · W1/M1 = non-cumulative
Enter a salary or hourly rate above
About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method with periodised thresholds. It handles the three tax territories, K codes with the 50% regulatory limit and its carry-forward, weeks 53, 54 and 56, the cumulative and W1/M1/X bases, student and postgraduate loans, and pension contributions on qualifying earnings. It still won't match your payslip to the penny in every case: it does not cover in-year tax code changes, payrolled benefits in kind, NI deferral across more than one employment, directors on the annual earnings period, or employer-level annual adjustments such as the Employment Allowance and the apprenticeship levy. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. K-code carry-forwards and weeks 53, 54 and 56 are handled, and the Year-to-date section reproduces a specific period exactly. What your employer may apply that this does not: a mid-year tax code change, benefits in kind processed through payroll, or NI deferral across more than one employment. For most employees on a standard tax code the difference is negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category — if in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
National Insurance and pensions meet at three points: contributions on the way in, the State Pension age switch while working, and entitlement built over a career. Pension income itself sits outside National Insurance, and employees over State Pension age stop paying, but employers keep paying on every pound above the Secondary Threshold. Between those points, the contribution method decides whether pension saving reduces National Insurance at all, with salary sacrifice the only route that does.
The 2029 cap marks the first time salary sacrifice for pensions will be partly brought back into the National Insurance base. For payroll, the change is less about rates than about data: cumulative sacrifice per employee, reported through software, with National Insurance switching on at a threshold mid-year. Employers and platforms that already treat pension deductions as structured data will absorb the reform as a rule update rather than a project.
Frequently asked questions
Is National Insurance taken from a private pension?
No. Income from a private or workplace pension is usually subject to Income Tax through PAYE, but National Insurance is not deducted from pension income [25]. The same applies to the State Pension, which counts towards taxable income but does not attract National Insurance [16].
Does an employer pay National Insurance for a worker over State Pension age?
Yes. The employee stops paying employee contributions and moves to category letter C, but the employer must still pay employer National Insurance at the normal rate on earnings above the Secondary Threshold [3] [7]. The Employment Allowance can still reduce the employer's overall bill where the business qualifies.
Do pension contributions reduce National Insurance?
Ordinary employee contributions do not. HMRC requires National Insurance to be calculated on gross earnings before pension deductions, whether the scheme uses net pay or relief at source [8]. Only salary sacrifice, where the employee gives up salary in exchange for an employer contribution, reduces the National Insurance base [15].
What happens to salary sacrifice National Insurance savings in 2029?
From 6 April 2029, only the first £2,000 a year of pension contributions made through salary sacrifice will be exempt from National Insurance [6]. Amounts above that will attract both employee and employer contributions, while Income Tax relief continues unchanged [5]. HMRC estimates that 3.3 million employees sacrifice more than the cap.
