If you’ve ever looked at your payslip and wondered why HMRC seems to take two bites out of your earnings — you’re not alone.

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Let’s break it down in a clean, Xenith Wealth style — simple, accurate, and actually useful.

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Income Tax vs National Insurance — The Quick Version

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Income Tax

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• Tax on your income: salary, rental income, dividends (different rules), self-employed profits, etc.

• Paid by employees, employers (PAYE), and the self-employed.

• Goes into the government’s general pot — think schools, defence, public services.

• Based on tax years (6 April – 5 April).

• You get a Personal Allowance before you start paying.

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National Insurance (NI)

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• A contribution towards certain state benefits— State Pension, maternity allowance, some sickness/ unemployment benefits.

• Employers and employees both pay NI.

• Self-employed people pay different NI classes.

• Paid weekly based on your earnings per pay period, not annually.

• No broad “allowance” — instead, you only pay NI once you exceed specific weekly/monthly thresholds.

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Why Do Both Exist?

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Historically, National Insurance was designed as a “contribution-based system” — pay in during your working life, access benefits later (most importantly the State Pension).

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Income Tax funds everything else.

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In practice, the lines blur because both go to the Treasury… but the rules remain separate.

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How the Two Taxes Work in Practice

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1. When You Start Paying

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Income Tax - Annual income over the Personal Allowance (£12,570 for most)

Employee NI (Class 1) - Weekly income over £242 (or monthly equivalent£1,048)

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2. How Rates Are Calculated

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Income Tax (England & NI 2025/26)

• 20% – Basic rate

• 40% – Higher rate

• 45% – Additional rate

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Your annual income determines which band applies.

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National Insurance (Employees)

• 10% on earnings between the Primary Threshold and Upper Earnings Limit

• 2% on earnings above the UEL

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The key difference: NI uses your pay-per-period earnings, not your total annual income.

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A Real-World Payslip Example

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Let’s say you earn £3,000 a month as an employee.

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Income Tax

• Annual income: £36,000

• Falling into the 20% basic rate band

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Tax is calculated annually but deducted monthly under PAYE.

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National Insurance

• Monthly earnings: £3,000

• NI applies over the monthly threshold of £1,048

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Each month is assessed individually — even if you had a low-income month earlier in the year. This is why Income Tax and NI don’t always move in sync when your pay changes.

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Income Tax vs NI for the Self-Employed

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If you’re self-employed:

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You pay:

• Income Tax on your taxable profit

• Class 2 NI (flat weekly amount — unless profits are very low)

• Class 4 NI (percentage of profits)

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Different rules… same two pots.

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Do Income Tax and NI Ever Interact?

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Not directly — but they do combine to reduce your take-home pay.

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The main interactions are:

• Higher earners may lose their Personal Allowance, increasing Income Tax.

• NI stops when you reach State Pension age, but Income Tax does not.

• Dividends and investment income attract Income Tax only, not NI.

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Why This Matters

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Understanding the difference helps you:

• Forecast take-home pay

• Spot errors on payslips (NI mistakes are incredibly common)

• Optimise salary vs dividends if you run a limited company

• Plan for State Pension qualification — you need 35 qualifying years

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For business owners, it’s also key for payroll compliance and cashflow planning.

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Final Thoughts — It’s Not Just “Tax is Tax”

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Income Tax and National Insurance look similar, behave differently, and affect different parts of your financial life.

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If you want to:

• double-check your tax code,

• optimise your salary/dividend setup,

• understand your NI record for State Pension, or

• get a clean breakdown of your payslip…

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Contact us!