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Rising National Insurance contributions (NICs) are increasing costs for small businesses, especially those with a single director. New rules in the 2025/26 tax year will require businesses to adjust their payroll management to manage expenses effectively. One of the most impactful opportunities is the Employment Allowance, which can reduce employer NIC liabilities by up to £10,500 per year—if claimed correctly.
Employer NIC Increase and Threshold Changes
From 6 April 2025:
- The employer NIC rate rose from 13.8% to 15%.
- The Secondary Threshold dropped to £5,000 per year (£96/week or £417/month).
This means employers now start paying NICs at much lower salary levels. Even modest payroll costs can quickly lead to NIC liabilities if not mitigated.
What is the Employment Allowance?
The Employment Allowance allows eligible businesses to reduce their annual employer NIC bill by up to £10,500. It can be claimed through payroll software or via HMRC’s Basic PAYE Tools.
However, businesses where the only employee is also a director are not eligible for the allowance. This presents a challenge for many single-director limited companies.
Employer NIC on Small Salaries
Let’s consider two common scenarios:
- Salary of £6,500/year: This meets the lower earnings limit (qualifying for a State Pension year) but results in £225 employer NIC.
- Salary of £12,570/year: Fully utilises the personal allowance but incurs £1,135.50 employer NIC at the 15% rate.
In both cases, unless the Employment Allowance is available, NIC costs are incurred in addition to salary payments.
How to Become Eligible for the Employment Allowance
You can unlock the Employment Allowance by incurring NIC liabilities for another employee. Here are two practical methods:
Employ a Second Staff Member: Hiring even one person for a short-term role (e.g. a student over summer or a spouse part-time) earning over £5,000/year makes your company eligible. There’s no requirement for ongoing employment—the trigger is simply incurring a NIC liability.
Add a Second Director (Who Is Paid): If you appoint a second director and pay both over £5,000/year, your company qualifies—even if both are directors. For example, a spouse can become a co-director and receive a part-time salary.
Maximising Director Salary with the Allowance
Once eligible, the company can offset employer NIC on a full salary of £12,570, meaning:
- No Income Tax (within personal allowance),
- No employee NIC (below primary threshold),
- An employer’s NIC up to £1,135 is covered by the Employment Allowance.
This setup ensures maximum tax efficiency for the company and the director.
Practical Steps to Take
- Review your payroll: If you’re a single-director company, consider whether you can employ another staff member part-time or appoint a second paid director.
- Claim via EPS submission: Ensure you file the Employment Payment Summary through your payroll software.
- Ensure genuine employment: To avoid HMRC scrutiny, ensure that roles (even short-term ones) are legitimate and accurately reflect the real work performed.
Additional Considerations
- The allowance is claimed per employer, not per employee.
- Eligibility resets annually with each tax year—review your payroll accordingly.
- If NICs are less than £10,500, only the amount incurred is claimed.
With rising employer NICs and a lower Secondary Threshold, accessing the Employment Allowance is more valuable than ever. A simple change, like hiring a part-time worker or adding a co-director, can lead to significant savings. Review your company’s structure now to take advantage of this tax break in 2025/26.