Tax by tax, spend by spend

National Insurance Contributions (NICs)

This Forecast in-depth page has been updated with information available at the time of the October 2024 Economic and fiscal outlook.

Taxes on different forms of personal income provide the biggest source of revenue for government. In 2024-25 we forecast National Insurance contributions (NICs) to raise £167.5 billion. That represents 14.6 per cent of all receipts and is equivalent to around £5,900 per household and 5.9 per cent of national income.

The main reason that NICs are the second-biggest source of revenue (after income tax) is that personal income makes up the majority of total national income. NICs are only levied on the labour income (the wages and salaries of employees and earnings of the self-employed) element of personal income. Different types of NICs are paid by employees, employers and the self-employed. Earnings are not subject to employee NICs when a person reaches the State Pension age. If an individual is still employed, then employers NICs will still be due.

NICs revenue is collected in a variety of different ways:

  • For the majority of employees, it is paid via the pay-as-you-earn (PAYE) system and is known as ‘Class 1’ NICs (including the Class 1A/1B element paid by employers). The amount of NICs to be paid is calculated by the employer and transferred directly to the tax authorities (HMRC). This is also known as being ‘deducted at source’. It means the individual does not need to deal directly with HMRC and that the tax is paid promptly.
  • For the self-employed, it is paid via the self-assessment (SA) system. This is mostly Class 4 NICs, which is related to self-employed earnings above a certain threshold, but a small amount is the flat-rate Class 2 NICs which also covers some self-employed people with lower incomes (this class of NICs was made voluntary in Autumn Statement 2023). The amount of tax to be paid is calculated by the individual and declared on a tax return sent to HMRC. Tax returns and associated payments are completed after the tax-year has ended – in most cases in the following January.
  • Other smaller sources of NICs include Class 3 (voluntary payments for those wishing to add to their NICs record), statutory payment deductions (mostly related to statutory maternity pay), investigation settlements and repayments.

For most employees income tax is also deducted at source, while the self-employed pay income tax via SA.

NIC receipts are, unlike most taxes, paid into the National Insurance Fund and are notionally used to pay for the state pension and other contributory benefits, where an individual’s past payment record has some influence on the size of payments they receive. A small amount is notionally directed to the NHS, although this only makes up a small proportion of NHS funding. As such, in some presentations of receipts, NICs are counted as ‘social contributions’ rather than taxes.

  Forecast methodology

Forecast process

The OBR commissions forecasts of NIC receipts from HM Revenue and Customs for each fiscal event. The forecasts start by generating an in-year estimate for receipts in the current year, then use a model to forecast growth in receipts from that starting point. We provide HMRC with economic forecasts that are then used to generate the NICs forecasts. These are scrutinised in a challenge process that typically involves two rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee and OBR staff. This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks (EFOs).

Forecasting models

The Class 1 NICs model uses the same approach as the PAYE income tax forecasting model. The forecast is generated by estimating year-on-year changes in receipts, using the last full-year figure as a baseline. The forecast is generated by estimating year-on-year changes in receipts, using the last full-year PAYE NICs receipts figure as a baseline. The model takes our forecast for wages and salaries growth, decomposed into growth from employment and growth from earnings. The model applies an average (‘effective’) tax rate (ATR) to extra income arising from employment growth and a marginal tax rate (MTR) to extra income arising from earnings growth to generate a forecast of PAYE NICs tax receipts.

The ATR is calculated using current receipts data: total PAYE income tax receipts divided by wages and salaries.

HMRC generates forecasts of MTRs using the last complete tax year of Pay As you Earn (PAYE) Real Time Information (RTI) data. Earnings and pension income are grown using forecast determinants and any difference in earning growth at different points in the earnings distribution. A simplified tax system is applied with tax thresholds grown with our assumptions on inflation and any preannounced freezes.

Future changes to the tax system (announced as Budget measures) and other ‘off-model’ factors (such as the effect on increasing incorporations) are also included in the forecast.

The Class 4 NICs model uses a similar approach to the SA income tax model. Liabilities are estimated by multiplying taxable profits by the average effective tax rate. Outturn taxable profits are grown in line with relevant parts of our economy forecast. The average effective tax rate is taken from HMRC’s Personal Tax Model (PTM) – a micro-simulation model based on a survey of taxpayers’ liabilities.

Main forecast determinants

The main determinants of our NICs forecast are those related to the tax base (in particular, employment and earnings growth) and those that are used by the Government in setting parameters of the tax system (notably CPI inflation). See the ready reckoners section below for more information on the effects of these determinants on NICs receipts.

Main forecast judgements

The most important judgements in our NICs forecast are related to the economy forecast that underpins it – most important of all being the outlook for employment and earnings growth. Alongside those, we need to make several other forecast judgements. These include:

    • In-year estimate – Our estimate for NICs receipts in the current year is determined by performance of receipts year-to-date, our economy forecast and any other indications from the HMRC model. The in-year estimate determines the base year from which we use our models to forecast receipts growth. For PAYE NICs, it implicitly reflects the average effective tax rate on wages and salaries.
    • Differential earnings growth – We use the same assumptions as the PAYE income tax forecast for earnings assumptions across the income distribution. Only employer NICs is progressive with the average tax rate rising in line with income, so it is, much less important than for income tax.
    • Assumption on bonuses – PAYE NICs receipts are received disproportionately towards the end of the financial year, reflecting the tax paid on end-of-year bonuses. Our assumptions on financial and non-financial sector bonus growth drive our expectations of these end-of-year receipts. Again, this is much less important for NICs than for income tax.
    • Incorporations – Our PAYE, SA, NICs and corporation tax (CT) forecasts are affected by our assumption that incorporations will continue their rising trend. Employment income is taxed more heavily than profits and dividends, so when formerly employed or self-employed individuals incorporate, their tax bills generally fall. Among other effects, this reduces NICs revenue. (See Box 4.1 of our November 2016 EFO for more detail.)

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  Previous forecasts

NICs receipts were weaker than our initial forecasts, in part reflecting weak average earnings growth more than offsetting stronger-than-expected employment growth. This was further amplified by the distribution of incomes, notably for new workers and among the self-employed, being skewed towards the lower end. Following the large downward revisions to our economy forecasts in December 2012 and March 2013, NICs receipts were much closer to forecast.

Initial post-pandemic forecasts for NICs receipts were too pessimistic, reflecting the income support provided by the Government, and the fact that high-paying sectors were less affected than we initially expected by the pandemic-related drop in economic activity. The temporary 1¼ percentage point rise in NIC rates for much of 2022-23 explains the difference between forecast and outturn in that year. Recent forecasts for NICs receipts have been revised up for stronger earnings growth, but policies have had effects in both directions. The freeze in thresholds from 2023-24 to 2027-28 and the rise in the employer NICs rate and reduction in the secondary threshold have boosted forecasts, but the reductions in the employee and self-employed NICs rates announced at Autumn Statement 2023 and Spring Budget 2024, led to lower forecasts.

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  Policy measures

Since our first forecast in June 2010, governments have announced a number of policy measures affecting our forecast for NICs. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Chapter 3 of the relevant Economic and fiscal outlook (Annex A prior to the March 2023 EFO).

Key NICs policy changes announced since 2010 have included:

    • The abolition of the NICs contracting-out rebate from April 2016. This was announced in Budget 2013 and our March 2016 estimate was that it would raise £5.6 billion in 2016-17 (an initial estimate in our March 2017 EFO indicated a yield of £5.9 billion). Around 50 per cent of this relates to public sector employers paying higher employer NICs.
    • NICs thresholds have generally been raised by inflation, with indexation moved from RPI to CPI from April 2012. The exceptions include the June 2010 Budget, which increased the threshold for employer NICs by £21 above indexation for 2011-12; the March 2020 Budget raised employee NICs thresholds by more than inflation; the March 2022 Spring Statement increased the National Insurance primary threshold and lower profits limit from July 2022 to match that of the income tax personal allowance; the November 2022 Autumn Statement froze these thresholds along with the NICs employer secondary threshold at their 2023-24 levels until April 2028; and the October 2024 Budget lowered the secondary threshold. Box 3.1 of our November 2023 EFO and Chapter 3 (from paragraph 3.38) of our March 2024 EFO discussed in more detail the impact of freezes and reductions to personal tax thresholds.
    • The introduction of an ‘employment allowance’. This gives a NICs-free threshold at the business level, taking the smallest employers out of employer NICs. At Autumn Budget 2024, the allowance was raised to £10,500 and the threshold of £100,000 was removed so that all eligible employers can claim the allowance.
    • The temporary increase in NICs rates for Classes 1, 1A, 1B and 4 by 1.25 percentage points announced in September 2021 and implemented in April 2022. This was reversed in November 2022 alongside the abolition of the health and social care levy that was due to be introduced in April 2023.
    • Significant reductions in the rate of NICs paid by employees and the self-employed were made in the Autumn 2023 Statement and in Spring Budget 2024. These included: a reduction in the Employee ‘Class 1’ NICs rate from 12 per cent to 10 per cent from January 2024, and to 8 per cent from April 2024; a reduction in the ‘Class 4’ NICs rate from 9 per cent to 6 per cent from April 2024; and the removal of the requirement to pay Class 2 NICs from April 2024 for self-employed individuals with profits of at least the lower profits limit (LPL).
    • Alongside the lowering of the secondary threshold to £5,000, the October 2024 Budget raised the employer ‘Class 1’ NICs rate from 13.8 per cent to 15 per cent from April 2025. Paragraphs 3.8 to 3.12 in the October 2024 EFO provide more detail of this policy change.

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  Ready reckoners

‘Ready reckoners’ show how our fiscal forecasts could be affected by changes in selected economic determinants. They are stylised quantifications that reflect the typical impact of changes in economic variables on receipts and spending. These estimates are specific to our March 2024 forecast and we would expect them to become outdated over time, as the economy and public finances, and the policy setting, continue to evolve (e.g. with the recent cuts to NICs rates). They are subject to uncertainty because they are based on models that draw on historical relationships or simulations of policy settings. More information can be found in the ‘Tax and spending ready reckoners’ spreadsheet we published on the data section of our website.

The table below shows that:

    • Changes in labour income have a large impact on NICs receipts. Staggered NICs thresholds mean that receipts rise (and fall) proportionately more than changes in labour income. NICs receipts are less geared towards average earnings than income tax, as a lower employee NICs rate is applied to earnings above the upper earnings limit.
WordPress Data Table

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