Tax vs. National Insurance: What is the Difference for Employers?

‘Tax’ and  'National Insurance'. These are two terms you might start hearing a lot of if you’re dealing with payroll in the UK. 

They might seem like just another chunk taken out of everyone’s paychecks, but these terms often cause confusion, so it’s good to clear up what purposes they serve and how they’re calculated differently. If you’re an HR manager, business owner or simply someone who touches upon employee pay, then we’re here to help you swot up on these kinds of topics.  So, let’s break down what tax and National Insurance are, how much they cost, and what you need to be aware of as an employer.

What is UK National Insurance?

National Insurance (NI) is just one of a few different types of payroll taxes in the UK. Still, it’s a fundamental part of the UK's social security system. Think of it as the UK’s way of ensuring that everyone chips in to cover public services like the NHS, state pensions, and other welfare benefits. Both you and your employees contribute, but the rates and rules can be a bit of a maze.

How much NI do employers pay?

As an employer, you contribute to NI based on how much your employees earn. This rate helps fund essential services and benefits that support your team members in times of need. Each employee will have a category letter assigned to them, and this will tell you how much you need to pay.  

If you’re wondering what the National Insurance rate in the UK is for employers, it’s 15.0% for the 2025/2026 tax year. 

How much NI do employees pay?

Guess what? Your employees also need to contribute to National Insurance but at different rates and thresholds. For 2025/2026, you can see these rates below. These contributions are deducted directly from their salaries by you as the employer. You’ll pay this through the PAYE (Pay As You Earn) system (and there are a few ways to make this more seamless every month).

National Insurance rates and thresholds for 2025/2026 

For reference, here are all the thresholds and categories to be aware of for the 2025/2026 tax year:

National insurance thresholds

Employee class 1 national insurance rates

Employer Class 1 national insurance rates

What is income tax? 

Now, here’s where things get a little more straightforward. Income tax is simply a tax paid on everyone’s personal income. 

It goes directly to HM Revenue and Customs (HMRC) and its purpose is to support a wide array of public services beyond just social security - think things like healthcare, education, and public transportation. 

What are the rates for income taxes? 

The income tax system in the UK is progressive, meaning that the rate increases as the individual's income increases. The rates for the 2025/2026 tax year are:

• 20% Basic rate on incomes over the personal allowance up to £50,270

• 40% Higher rate on incomes from £50,271 to £150,000

• 45% Additional rate on incomes over £150,000

Unlike National Insurance, income tax rates scale with income, which means higher earners pay a higher rate.

Tax and National Insurance: What is the Difference? 

Ok, so let’s do a little recap of what the main differences are between tax and NI contributions, particularly from the employer's Point of View: 

They serve different purposes

While both tax and National Insurance provide funding for public services, NI is earmarked explicitly for social security benefits. Income tax, however, funds a broader range of government services.

The rate structure isn’t the same 

Income tax rates are progressive, based on the amount of taxable income that an individual earns. National Insurance rates, on the other hand, are calculated on a per-earnings basis within certain thresholds.

They come with different benefits 

National Insurance contributions qualify individuals for certain benefits like the State Pension and Jobseeker's Allowance. Income tax does not.

But at the end of the day, it all goes to HMRC

At the end of the day, all roads lead to HMRC. If you’re an employer, then you’ll need to pay both employer's NI contributions and withhold employee NI and income tax through the PAYE system.

Working it all out with PayFit

Managing tax and National Insurance can be a bit of a minefield, especially with rates and legislation more changeable than the British weather. 

But while these contributions might seem like just another payroll deduction, they’re key to funding critical public services and benefits. Knowing how they work helps you manage your payroll effectively and keeps you ready for any questions your team might throw your way. 

And remember, when the going gets tough, PayFit is here to help streamline everything for you.

 Our software not only keeps track of these changes for you but also automates all the calculations and deductions for these. This means you can spend less time worrying about compliance and more time focusing on what you do best—running your business.