National Insurance Changes 2025/26: What Employers and Directors Need to Know

 The Cost of Employing Staff Just Went Up

From 6 April 2025, major changes to National Insurance (NI) came into effect across the UK. Announced in the Autumn 2024 Budget, these reforms are already increasing the cost of employing staff, while also affecting the tax position of directors, business owners and the self-employed.

The most significant change is the rise in employer NI contributions from 13.8 percent to 15 percent. At the same time, the threshold at which employers begin paying NI on employee earnings has dropped from £9,100 to just £5,000. This double shift means even low to mid-salaried staff are now more expensive to employ.

For business owners and directors who take a combination of salary and dividends, these changes also influence how remuneration should be structured. Sole traders, meanwhile, will benefit from the abolition of Class 2 contributions but must understand how their State Pension entitlements are preserved under the new rules.

Employer NI: Higher Rate and Lower Threshold

For employers, the key change is the Class 1 secondary NI contribution increase. From 6 April 2025:

• The standard employer NI rate rose from 13.8 percent to 15 percent
• The secondary threshold dropped from £9,100 to £5,000 per year
• The Employment Allowance increased from £5,000 to £10,500
• Previous restrictions on claiming the allowance were removed

This means that almost all businesses will now pay employer NI earlier and at a higher rate. Even relatively modest salaries trigger larger NIC bills. For example, an employee earning £30,000 per year will now cost an additional £285 in NI compared to last year.

However, the increased Employment Allowance does provide relief. Most small employers will now be able to offset up to £10,500 of employer NICs annually. Crucially, the previous cap — which blocked access to the allowance if your total employer NICs exceeded £100,000 — has been lifted. This change widens access significantly.

Impact on Salary Strategies for Directors

Many directors of owner-managed businesses choose to take a low salary and top up their income with dividends. Traditionally, they keep their salary just above the primary threshold for NI to gain qualifying years for the State Pension without incurring excessive NIC costs.

With the threshold now frozen and the employer rate increased, business owners need to reassess:

• What level of salary remains tax-efficient in 2025/26?
• Should dividend extraction be brought forward ahead of planned changes in dividend tax?
• Does it still make sense to remain under the Class 1 NI primary threshold?

Salaries between the primary threshold (£12,570) and the upper earnings limit (£50,270) remain subject to employee NI at 10 percent (down from 12 percent in previous years), and employer NI at the new 15 percent rate.

For many directors, the optimal salary-dividend balance must now be recalculated in light of these new costs.

Changes for the Self-Employed

For sole traders and partners, the biggest news is the abolition of Class 2 NICs. From 6 April 2025:

• Class 2 NICs — a flat-rate weekly payment — are abolished
• Class 4 NICs remain in place, with the main rate falling from 9 percent to 8 percent
• The upper profits rate remains at 2 percent for profits over £50,270

Importantly, qualifying years for the State Pension will now be calculated through Class 4 contributions. This removes the need for the separate Class 2 system, simplifying tax compliance for the self-employed.

A sole trader earning £40,000 per year, for example, will now pay £320 less in NICs compared to 2024/25, thanks to the lower Class 4 rate and the removal of Class 2.

Class 1A and 1B NICs on Benefits and Settlements

For employers providing benefits-in-kind or using PAYE settlement agreements (PSAs), the cost of compliance has also increased.

• Class 1A and 1B NICs are now aligned with the new employer rate of 15 percent
• These apply to company cars, health insurance, gym memberships and other benefits
• Settlement agreements, often used to simplify PAYE on minor items, are now more expensive

Companies providing director benefits through salary sacrifice arrangements or other benefits-in-kind must reassess their total cost to ensure budgets remain accurate.

National Insurance Planning for 2025/26

The new NI structure means planning is essential for both payroll and profit extraction. Key steps for 2025/26 include:

• Reviewing salary levels for directors and staff in light of the new thresholds and rates
• Making sure the Employment Allowance is fully utilised where eligible
• Budgeting for higher Class 1A and 1B NICs if offering staff benefits
• Ensuring accurate profit projections for the self-employed to reflect Class 4 contributions
• Considering whether dividend extraction remains the most tax-efficient strategy

Although employee NIC rates have been reduced slightly, the increase in employer costs will impact many small business margins. For companies in labour-intensive sectors, these changes will likely translate to higher operating costs.

 Key Facts About National Insurance Changes 2025/26

From 6 April 2025, employer National Insurance rates increased from 13.8 percent to 15 percent. The secondary threshold was reduced from £9,100 to £5,000, meaning employers pay NI on more of each employee’s earnings. The Employment Allowance doubled to £10,500 and is now available to more businesses. Class 2 NICs for the self-employed have been abolished, while Class 4 rates dropped from 9 percent to 8 percent. Directors and sole traders should now review their salary and profit strategies to remain tax-efficient under the 2025/26 rules.

Strategic Payroll Adjustments for Growing Teams

For companies in a growth phase, the 2025/26 NI changes bring an extra layer of complexity to scaling payroll. Hiring new staff now comes with a higher marginal cost per employee, which means employers need to be more proactive in managing their staffing budgets.

The reduction of the secondary threshold to £5,000 means employer NICs are due on almost all wages from the outset. As a result, new hires on even modest salaries will immediately trigger employer contributions at 15 percent. For businesses with multiple part-time employees or seasonal workers, this can have a compounding effect on monthly liabilities.

To help offset these pressures, businesses should consider:

• Staggering new hires across tax years to maximise use of the Employment Allowance annually
• Outsourcing non-core roles where practical to avoid direct payroll burdens
• Using fixed-term contracts to manage cash flow while maintaining workforce flexibility
• Structuring pay with tax-free benefits (such as approved mileage, mobile phones or pension contributions) that don’t attract NICs
• Reviewing use of bonuses and commission structures to control when earnings cross NIC thresholds

Additionally, businesses expecting significant growth should model out the point at which their employer NICs exceed the Employment Allowance. Once the £10,500 allowance is fully used, the marginal cost of employment increases sharply. For companies with 10+ staff, this point may be reached early in the tax year, affecting future hiring plans.

Merranti can assist in forecasting employer NICs under different growth scenarios, helping business owners make informed hiring and remuneration decisions. With labour being one of the largest controllable costs in any business, understanding these dynamics can protect profit margins while supporting sustainable growth.

How Merranti Accounting Can Help

For business owners, payroll managers and self-employed clients, these changes require careful planning. Merranti Accounting can support you with:

• NI cost analysis and salary reviews for directors and staff
• Payroll optimisation and Employment Allowance claims
• Advice on benefits-in-kind and Class 1A liabilities
• Dividend vs salary planning under current and future tax rules
• Self-employed Class 4 forecasting and pension qualification reviews

We offer fixed-fee and ongoing advisory services to ensure your business remains compliant and tax-efficient under the new system.

To review how the 2025/26 NI changes affect your business, get in touch with our tax team today.

Call: 01342 836 557
Email: contactus@merranti.com