In the U.K, there are different classes of national insurance employers and employees are expected to pay. How much they pay depends on their employment status and their earnings.
HM Revenue & Customs sets different thresholds every year to help employers determine how much to deduct from their employees’ paychecks.
Upper earnings limit, or UEL, is essentially the maximum amount employees need to pay in terms of Class 1 National Insurance contributions — I.e., the type of social security employees and employers are generally expected to pay in order to fund certain benefits – like statutory sick days and pension.
As a side note, here’s also Class 2 national insurance, which applies to people who are self-employed and Class 3, which applies to voluntary contributions.
Upper and lower earnings limits and primary threshold
There are three main thresholds, including lower earnings limit (LEL), primary threshold, and upper earnings limit (UEL). To really understand upper earnings limit, you have to understand primary threshold and earnings limit. We summarize these three categories below:
Primary threshold – primary threshold is the minimum amount of money an employee needs to earn to start paying Class 1 national insurance contributions.
Lower earnings limit – employees who do not reach the primary threshold in their earnings but do earn an amount equivalent to or above the lower earnings limit don’t have to pay NIC but are still entitled to the benefits
Upper earnings limit – employees are required to pay the regular amount of NIC on anything between primary threshold and the upper earnings limit, but anything above the upper earnings limit they can pay a smaller amount of NIC lower rate
How does upper earnings limit work?
New national insurance bands and rates are generally announced during the Chancellor of the Exchequer’s Budget or Autumn Statement.
In March 2023, for example, Chancellor Jeremy Hunt announced the following rates and caps for upper earnings threshold:
- £50,270 per year
- £4,189 per month
- £967 per week
In terms of rates, employees who earn above the upper earnings threshold are expected to pay NIC at a rate of 12% for anything below the threshold and 2% for anything above the threshold. Note that this rate requirement applies to employees falling under the national insurance category letter A, meaning all employees except for those in special categories, like C – for employees over the state pension age, or H – for apprentices under 25, among others.
Managing earnings thresholds on a global scale
Just like in the UK, national insurance rates and bands are generally updated every year. This goes for thresholds set in other countries, as well.
To manage and stay on top of these changes or updates, companies need to constantly be in contact with local tax and compliance experts to make sure they’re fully updated. This can get messy and time consuming.
One way to get through this hurdle is by partnering with a global payroll platform that offers local compliance expertise but can also automate the entire process and ensure that updates are made automatically across different countries.