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Key Highlights
- National Insurance Category Letters classify employees based on age, apprenticeship status, and employment type. They determine the contributions employers and employees must make towards National Insurance (NI).
- Employers must assign the correct NI category based on employee circumstances. Incorrect categories can lead to overpayment or underpayment of contributions, affecting payroll accuracy and benefit eligibility.
- NI contributions affect an individual’s eligibility for the State Pension. Correct contributions are essential to accumulating enough qualifying years to ensure full pension benefits.
What is the essence of the UK national insurance?
National Insurance (NI) is a crucial component of the UK’s welfare system, whose primary purpose is to ensure taxpayers contribute to a shared fund supporting individuals throughout various life stages. To qualify for these benefits, taxpayers must accumulate a certain number of “qualifying years” when an individual has paid or been credited with sufficient National Insurance contributions (NICs). These contributions ensure eligibility for critical benefits like the State Pension and other support programs.
What are the NI category letters?
NI is organised into different classes and category letters to ensure a structured contribution system for taxpayers based on their employment and income status.
- Class 1 applies to employees and employers who contribute based on the employee’s earnings. These contributions are mandatory and deducted directly from wages.
- Employers pay Class 1A and 1B to cover NI on employee benefits and certain company expenses, such as cars, health insurance, and other perks.
- Class 2 is for self-employed individuals. It is voluntary for those earning below £6,725 per year, while those earning between £6,725 and £12,570 receive automatic credits towards their NI record. Self-employed individuals earning above £12,570 are deemed to have paid.
- Class 3 is voluntary and allows individuals to fill gaps in their contribution history to boost their qualifying years for benefits like the public pension.
- Class 4 is for self-employed individuals who earn above a certain income level and requires them to contribute additional amounts.
Within Class 1, various category letters classify employees based on specific conditions, such as age, apprenticeship status, or marital status. These letters determine the number of NIC employees and employers required.
Read also: Self-Employed Class 2 National Insurance Contributions Explained.
How do employers determine the correct NI category?
Employers determine the correct category for their employees based on guidelines provided by HMRC. An employee’s Class 1 NI contributions are made up of two parts: deductions from their salary (employee’s contribution) and payments made as employer’s contribution.
The amount deducted and paid depends on the employee’s National Insurance category, which reflects their employment status, age, and other conditions like apprenticeship or marital status. Employers use these letters when processing payroll to calculate the correct contributions for both the employee and the employer, ensuring that the appropriate amounts are deducted and remitted based on the employee’s earnings within each tax band.
Find out more: GOV.UK Employer PAYE Reference Number 2024 Explained
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What are the main category letters, and which group do they represent?
| Letter | Employee Group |
|---|---|
| A | All employees apart from those in groups B, C, H, J, M, V and Z in this table |
| B | Married women and widows entitled to pay reduced rate contributions |
| C | Employees over the State Pension age |
| H | Apprentices under 25 |
| J | Employees who can defer NI payments because they’re already paying it in another job |
| M | Employees under 21 |
| V | Employees who are working in their first job since leaving the armed forces (veterans) |
| Z | Employees under 21 who can defer National Insurance because they’re already paying it in another job |
What are the category letters for employees who work in freeports?
Employers use the letters F, I, L and S for employees who work in a freeport.
| Letter | Employee Group |
|---|---|
| F | All employees working in freeports, apart from those in groups I, L, and S, are in this table. |
| I | Married women and widows who work in freeports are entitled to reduced National Insurance. |
| L | Employees who work in freeports and can defer National Insurance because they’re already paying it in another job. |
| S | Employees who work in freeports and are over the public pension age |
What are the category letters for employees who work in investment zones?
Employers use the letters N, E, D and K for employees who work in an investment zone.
| Letter | Employee Group |
|---|---|
| N | All employees who work in investment zones, apart from those in groups E, D, and K, are in this table. |
| E | Married women and widows working in investment zones are entitled to pay reduced National Insurance. |
| D | Employees who work in investment zones can defer NI contributions because they’re already paying it in another job. |
| K | Employees who work in investment zones and are over State Pension age. |
What does the category letter X mean?
Employers use category X for employees who do not have to pay National Insurance, for example, because they are under 16.
What are the class 1 national insurance rates and categories for the tax year 2024/25?
| Weekly | Monthly | Annually | |
|---|---|---|---|
| Lower Earnings Limit (LEL) | £123 | £533 | £6,396 |
| Primary Earnings Threshold (PT) | £242 | £1,048 | £12,570 |
| Secondary Earnings Threshold (ST) | £175 | £758 | £9,100 |
| Freeport Upper Secondary Threshold (FUST) | £481 | £2,083 | £25,000 |
| UEL/UST/AUST/VUST | £967 | £4,189 | £50,270 |
| UEL – Upper Earnings Limit
UST – Upper Secondary Threshold AUST – Apprentice Upper Secondary Threshold VUST – Veterans Upper Secondary Threshold |
|||
Employee NI rates
| Letter | £123 to £242 (£533 to £1,048 a month) | £242.01 to £967 (£1,048.01 to £4,189 a month) | Over £967 a week (£4,189 a month) |
|---|---|---|---|
| A | 0% | 8% | 2% |
| B | 0% | 1.85% | 2% |
| C | N/A | N/A | N/A |
| D | 0% | 2% | 2% |
| E | 0% | 1.85% | 2% |
| F | 0% | 8% | 2% |
| H | 0% | 8% | 2% |
| I | 0% | 1.85% | 2% |
| J | 0% | 2% | 2% |
| K | N/A | N/A | N/A |
| L | 0% | 2% | 2% |
| M | 0% | 8% | 2% |
| N | 0% | 8% | 2% |
| S | N/A | N/A | N/A |
| V | 0% | 8% | 2% |
| Z | 0% | 2% | 2% |
Employer NI rates
| Letter | £123 to £175 (£533 to £758 a month) | £175.01 to £481 (£758.01 to £2,083 a month) | £481.01 to £967 (£2,083.01 to £4,189 a month) | Over £967 a week (£4,189 a month) |
|---|---|---|---|---|
| A | 0% | 13.8% | 13.8% | 13.8% |
| B | 0% | 13.8% | 13.8% | 13.8% |
| C | 0% | 13.8% | 13.8% | 13.8% |
| D | 0% | 0% | 13.8% | 13.8% |
| E | 0% | 0% | 13.8% | 13.8% |
| F | 0% | 0% | 13.8% | 13.8% |
| H | 0% | 0% | 0% | 13.8% |
| I | 0% | 0% | 13.8% | 13.8% |
| J | 0% | 13.8% | 13.8% | 13.8% |
| K | 0% | 0% | 13.8% | 13.8% |
| L | 0% | 0% | 13.8% | 13.8% |
| M | 0% | 0% | 0% | 13.8% |
| N | 0% | 0% | 13.8% | 13.8% |
| S | 0% | 0% | 13.8% | 13.8% |
| V | 0% | 0% | 0% | 13.8% |
| Z | 0% | 0% | 0% | 13.8% |
Which category applies if I want to defer contributions because I have two jobs?
If you want to defer contributions because you have two jobs, Category J and Z apply. These categories are for employees who can defer NIC as they already pay them in another job.
What happens if there are gaps in your National Insurance record?
If there are gaps in your national records, it undermines the number of qualifying years, which has to be 35 years for you to qualify for government pension. Therefore, pay class 3 NICs to fill the gaps.
See also: How to Get a Share Code Online and Prove Your Right to Work In the UK
Can my National Insurance category change?
Yes, your NI letter can change if your job circumstances change. For example, if an employee turns 21, their NI category will automatically adjust. Similarly, if an employee holding two jobs who previously deferred NI contributions experiences a change in circumstances, they should apply for an updated category. Ensure that the necessary paperwork is provided to demonstrate the change in status.
What happens if my NI category is incorrect?
If your category is incorrect, you may pay more or less NIC than required. It is essential to double-check your category to prevent misallocation of your deductions.
Should you find that you are using the wrong category, your PAYE processing team will correct the error in the payroll software, automatically triggering the necessary reallocations with HMRC.
After that, as the affected employee, you should get the employer’s PAYE reference number and the accounts office reference. Contact HMRC’s tax helpline, explain that your payroll was processed with an incorrect category, and provide the incorrect and correct national insurance category. You should then request a reallocation of their deductions. The HMRC advisor should be able to update the records and ensure that all contributions are correctly reallocated to the appropriate NI number.
Do NI category letters affect my State Pension?
Yes, your NI letter determines how much you contribute over time, and accumulating enough qualifying years of contributions is essential to receiving the full national pension. If you’re in a category with reduced or deferred contributions, it could affect how much you receive when you retire.
How do NI contributions affect employees with multiple jobs?
If you have multiple jobs, you may be paying more NI contributions than necessary without receiving any additional benefits. To avoid this, applying for deferral of NI contributions for your second job is essential. This ensures that your income and contributions are consolidated by HMRC, keeping you compliant and preventing overpayment.
What happens if I’m over the State Pension age?
Once you reach the public pension age, you may keep working but become eligible to receive your pension. Remember that your national pension age is different from your work pension age.
How does NI apply to apprentices and younger workers?
Yes, anyone over 16 is automatically issued a National Insurance number. If they gain employment, they are typically assigned to the relevant under 21 or apprenticeship category, depending on their situation.
Disclaimer: This blog is for informational purposes only and reflects our understanding of the topics discussed. It should not be considered tax advice. Please consult a qualified tax advisor for personalised guidance.
