Class 1 National Insurance is the earnings-related employee and employer charge collected through PAYE on wages, salaries and director remuneration. For 2026/27, employees generally pay 8% between the Primary Threshold and Upper Earnings Limit, then 2% above it, while the employer liability is calculated separately. HMRC explains how much National Insurance employees pay.
You're probably looking at a payslip, payroll report or dividend decision and wondering why National Insurance appears as a separate deduction. For a limited company director, that question matters beyond understanding one line on a payslip. The salary you choose can create an employee deduction, an employer cost, or both, while dividends sit outside Class 1 NIC.
The rules become much easier once you separate four ideas: what Class 1 covers, which threshold applies, who pays each side, and how directors are assessed across the tax year. After that, the salary-versus-dividend decision becomes a question of trade-offs rather than guesswork.
Class 1 National Insurance and Why It Shows Up on Your Payslip
A limited company director scans their payslip and sees PAYE income tax, pension deductions and a line marked employee National Insurance. That line is usually primary Class 1 National Insurance, deducted from gross employment income before the amount reaches your bank account.
Class 1 NIC applies to earnings from employment, including wages, salaries, bonuses and remuneration paid to directors. It's collected through the company's PAYE payroll, alongside income tax, and reported to HMRC through the employer's payroll submissions. A clear explanation of the wider PAYE calculation is available in this guide to how PAYE is calculated.
The word “class” identifies the type of contribution
Class 1 isn't the same as every other form of National Insurance:
- Class 1 applies mainly to employees and directors receiving pay through payroll.
- Class 2 is associated with self-employed work and has a different contribution structure.
- Class 3 consists of voluntary contributions used in some circumstances to protect a National Insurance record.
- Class 4 applies mainly to self-employed profits rather than employment salary.
The distinction matters because a limited company director can have more than one income route. Salary is employment income and can attract Class 1 NIC. Dividends are distributions from company profits and don't trigger Class 1 NIC merely because the recipient is also a director.
There are two separate Class 1 liabilities
Class 1 has an employee side and an employer side. The employee's primary contribution is deducted from gross salary. The company's secondary contribution is an additional payroll cost paid by the business, not taken from the director's net pay.
That means one salary decision can affect both your personal take-home pay and the company's cost of employing you. A salary that looks modest on the payslip may still create a secondary liability for the company, depending on the relevant threshold and available reliefs.
Practical rule: Never assess a director's salary by looking only at the employee deduction. The company's secondary NIC is part of the real cost of extracting money as salary.
The Thresholds That Decide Who Pays and When
Class 1 NIC doesn't apply at one universal rate from the first pound of earnings. The system uses four important thresholds, and each one answers a different question.
The Lower Earnings Limit, or LEL, is relevant to National Insurance benefit and State Pension records. Earnings can be below the point where employee contributions start, yet still help a worker build entitlement under the rules. The Primary Threshold, or PT, is the point at which employee Class 1 NIC normally begins.
The Secondary Threshold, or ST, is the point at which the employer's liability normally begins. The Upper Earnings Limit, or UEL, marks the point where the employee rate changes from the main rate to the lower rate.
Class 1 NIC thresholds for 2025/26 and 2026/27
| Threshold | 2025/26 weekly | 2025/26 annual | 2026/27 weekly | 2026/27 annual |
|---|---|---|---|---|
| Lower Earnings Limit | £125 | £6,500 | £129 | £6,708 |
| Primary Threshold | £242 | £12,570 | £242 | £12,570 |
| Secondary Threshold | £96 | £5,000 | £96 | £5,000 |
| Upper Earnings Limit | £967 | £50,270 | £967 | £50,270 |
The figures in the table come from the government's published rates and thresholds for employers. The same table shows the important gap between the LEL and PT. An employee can earn enough to protect aspects of their contribution record without paying employee NIC on those earnings.
For 2026/27, the LEL rises to £129 per week, or £6,708 annually, while the PT remains £242 per week, or £12,570 annually, and the ST remains £96 per week, or £5,000 annually. The UEL remains £50,270 annually, equivalent to £967 weekly, according to the National Insurance rates and allowances publication.
Thresholds are reviewed, so check the current HMRC figures before changing payroll. If you're comparing Class 1 with voluntary contributions, the distinction is covered in this guide to Class 3 NI contributions.
Employee Contributions Versus Employer Contributions
The employee and employer parts of Class 1 are separate liabilities. Treating them as one combined deduction is a common source of confusion, especially when a director is comparing salary with dividends.
For 2026/27, the employee main rate is 8% on earnings from the Primary Threshold up to the Upper Earnings Limit, followed by 2% above the Upper Earnings Limit. The employee contribution comes out of gross pay, so it reduces the amount the individual receives after payroll deductions. HMRC's employee guidance confirms the 8% and 2% bands.
The employer pays secondary Class 1 NIC on qualifying earnings above the Secondary Threshold. That amount is added to the company's employment cost. It doesn't appear as a deduction from the employee's net salary, although it can affect how much profit remains in the company after paying remuneration.
Why the split matters to directors
The split reflects two different relationships. The employee contribution is connected to the individual's earnings and contribution record. The employer contribution is a cost of employing someone and is paid by the company.
For a director, both sides should be included in the decision:
- Personal calculation: How much primary NIC will reduce your salary?
- Company calculation: How much secondary NIC will the business pay?
- Planning calculation: Could another mix of salary, dividends and pension funding produce a better overall result?
- Relief calculation: Could the company use the Employment Allowance rules to reduce its secondary liability?
The answer isn't automatically “pay no salary”. A salary can support an employment record and may be commercially sensible, but the best level depends on the company's wider tax position and your personal circumstances.
Worked Examples With Real Numbers
The following examples use the 2025/26 thresholds and main employee rates from the published government guidance. Payroll calculations can vary with payment timing, category letters and the precise treatment of earnings, so these examples show the structure rather than replacing a payroll calculation.
Two income structures
A standard employee receives a £45,000 salary. A limited company contractor outside IR35 receives £12,570 as salary and £37,430 as dividends, producing the same headline total of £50,000 in the second scenario. The figures are deliberately different because they illustrate how Class 1 applies to employment pay, not to dividends.
| Item | PAYE Employee on £45k | Outside-IR35 Director (£12,570 salary + £37,430 dividends) |
|---|---|---|
| Salary | £45,000 | £12,570 |
| Dividends | None | £37,430 |
| Total stated income | £45,000 | £50,000 |
| Employee Class 1 NIC basis | Salary above the £12,570 PT | Salary at the PT |
| Employee Class 1 NIC | Calculated on salary between the PT and UEL | Nil primary NIC on the stated salary |
| Employer Class 1 NIC basis | Salary above the £5,000 ST | Salary above the £5,000 ST |
| Dividend subject to Class 1 NIC | Not applicable | No |
For the employee, the salary exceeds the £12,570 Primary Threshold, so the earnings above that point fall into the main employee Class 1 band until the Upper Earnings Limit. The employer also assesses its own liability using the £5,000 Secondary Threshold. Those are two calculations attached to the same employment income.
For the contractor-director, the £12,570 salary reaches the Primary Threshold but doesn't exceed it, so the stated salary produces no primary employee Class 1 NIC. The company still has to consider secondary Class 1 NIC on the salary above the Secondary Threshold. The £37,430 dividend doesn't create Class 1 NIC because it isn't salary or director remuneration processed through PAYE.
The same headline income can produce a different National Insurance outcome when the payment routes differ.
The director's annual calculation deserves particular care because directors aren't always assessed in the same way as ordinary employees. A director National Insurance calculator can help test the payroll side, but it can't decide whether the underlying remuneration strategy suits your company.
The Director Annual Earnings Method Explained
Ordinary employees are commonly assessed through the payroll period, using the relevant weekly or monthly calculation method. Directors have a special treatment that can assess Class 1 NIC by reference to annual earnings.
The annual earnings method adds together the director's relevant salary, bonuses and other taxable remuneration paid during the tax year. The Primary Threshold and Upper Earnings Limit are then applied against the aggregated annual amount, rather than treating every pay period as a completely separate opportunity to use the thresholds.
How the calculation works
- Aggregate payments: Combine the director's relevant employment payments for the tax year.
- Apply thresholds: Compare the annual total with the Primary Threshold and Upper Earnings Limit.
- Calculate liability: Assess primary Class 1 NIC against the aggregated earnings.
- Reconcile payroll: Ensure deductions taken during the year reflect the final annual position.
This method prevents a director from effectively resetting the threshold every time salary timing changes. Paying a director in one large amount or spreading the same annual salary across several payments doesn't create a fresh annual allowance each time.
A director receiving £12,570 of salary across the tax year has a clean nil primary contribution on that stated salary because the total reaches, but doesn't exceed, the £12,570 Primary Threshold. The payment frequency doesn't change that annual comparison, although payroll processing still needs to apply the correct method and category letter, commonly A or J depending on the circumstances.
The important challenge is that the Primary Threshold isn't automatically the ideal salary level. Once the company's secondary NIC, Employment Allowance position, pension objectives and dividend capacity are considered, a salary below, at or above the threshold may each be defensible in different situations.
Practical Ways to Shape Your Class 1 NIC
A director has legitimate planning choices, but there isn't one universal salary figure that works for every company. The right decision depends on the company's available profit, the director's other income, pension position, dividend capacity and personal cash requirements.
Start with the salary band, not a pre-set answer
Salary below the Primary Threshold can avoid primary employee NIC, while salary above it can create the employee charge. Salary above the Secondary Threshold can also create a company liability, so the director should review both calculations together.
A salary around the Primary Threshold may preserve a straightforward payroll position, but it can create secondary NIC for the company. A lower salary may reduce that employer cost, yet the director must consider whether it supports the desired contribution record and whether the lost salary is replaced through another efficient route.
Consider pension funding as a separate extraction route
Employer pension contributions can be made directly by the company rather than paid as salary first. Properly structured employer contributions can reduce the employment income exposed to Class 1 NIC while building a retirement fund, but they need to fit pension limits, scheme rules and the director's long-term objectives.
Salary sacrifice can also be relevant for benefits such as cycle-to-work arrangements and electric vehicles. The tax and National Insurance treatment depends on the benefit and the arrangement, so the paperwork should be settled before payroll changes are made.
Check reliefs before rejecting salary
The Employment Allowance can reduce eligible employers' secondary Class 1 NIC, potentially changing the comparison between a low salary and a salary closer to the Primary Threshold. Eligibility and the available cap must be checked against the current rules, particularly where the company has other employees or more than one director.
Dividends may then form part of the wider extraction mix where the company has distributable profits and the legal conditions for declaring them are met. They aren't a substitute for every employment benefit or pension objective, so salary, dividends and employer pension contributions should be modelled together.
Common Mistakes and When to Get Professional Help
Most Class 1 problems don't begin with a complicated tax scheme. They begin with a director changing the timing or amount of pay without updating the payroll logic.
- Ignoring the annual method: Resetting director salary mid-year can create an incorrect cumulative calculation and leave deductions or payroll records out of alignment.
- Missing employer NIC: Paying salary above the Secondary Threshold without budgeting for the company's secondary liability understates the cost.
- Misapplying the director method: Ordinary employees shouldn't automatically be assessed using the director annual earnings method.
- Forgetting irregular pay: Bonuses, arrears and one-off remuneration still need to be considered when payroll calculates employment income.
- Misclassifying an office-holder: A director's remuneration can fall within employment rules even when the payment is described informally as a fee or draw.
Each mistake has a practical consequence. The company may underpay PAYE, deduct the wrong amount from the director, lose available relief or need to correct historic payroll submissions. HMRC can identify inconsistencies through payroll reporting, and late or inaccurate payments can create additional compliance work.
Use a decision checklist
A review becomes sensible when:
- Remuneration changes: You're introducing bonuses, changing salary frequency or moving from salary to dividends.
- Company circumstances change: The business becomes larger, adds employees or needs to reassess Employment Allowance eligibility.
- IR35 status changes: A contractor moves between inside and outside IR35 arrangements.
- Payroll receives a notice: HMRC raises a PAYE or National Insurance query.
- Historic errors appear: Earlier payroll periods may have used the wrong category letter or calculation method.
A qualified tax adviser, accountant or experienced payroll specialist can review the annual calculation, secondary liability and record of payments together. That's safer than correcting one payslip in isolation.
Frequently Asked Questions on Class 1 NIC
Does a limited company director pay Class 1 NIC on dividends?
No. Dividends don't fall within Class 1 NIC simply because the recipient is a director. Salary, bonuses and other employment remuneration can trigger Class 1, while dividends are distributions from available company profits and follow a different tax treatment.
The director's payroll should still record salary correctly, and the company must have the necessary distributable profits before declaring dividends. Return to the worked comparison above when reviewing the two payment routes.
How does Class 1 differ from Class 2 and Class 4 NIC?
Class 1 is linked to employment pay and is collected through PAYE. Class 2 and Class 4 relate primarily to self-employed work, with Class 4 calculated by reference to self-employed profits rather than a director's payroll salary.
Someone can be both a director and self-employed in different activities, so the correct class depends on how each income stream arises. Review the relevant contribution class before assuming that one rule covers every source of income.
Does a £12,570 salary avoid all employee NIC?
A salary of £12,570 reaches the 2025/26 and 2026/27 Primary Threshold, so it doesn't exceed the point at which primary employee NIC begins. On the figures stated here, that means no primary Class 1 NIC on the salary itself, but it doesn't remove the company's separate secondary liability above the Secondary Threshold.
The director annual earnings method also means payment timing shouldn't be used to create repeated threshold allowances. Check the annual method and the employer calculation together.
What happens if someone opted out of the State Pension through contracting out?
Contracting out of the additional State Pension is no longer an active arrangement for current employment planning. Earlier periods can still have legacy effects on an individual's National Insurance and pension record, so the answer depends on personal history rather than a current Class 1 choice.
If your record includes earlier contracted-out employment, check your State Pension information and obtain personal advice before changing salary solely to pursue a contribution outcome.
If you're a limited company director, Tax Compass provides practical guidance on PAYE, director National Insurance and take-home pay calculations so you can compare salary, dividends and pension contributions with clearer assumptions. Visit Tax Compass to review the relevant tools and decide whether your remuneration structure needs a specialist review.