Nice Problem to Have!

Three main changes to Employer’s National Insurance contributions (NICs) were announced in last October’s Autumn Statement, all of which came into effect from 6 April 2025:

• The rate of Employer’s NICs increased from 13.8% to 15%.
• The threshold at which Employer’s NICs start to be due reduced from £9,100 to £5,000 per employee.
• The employment allowance (EA) went up from £5,000 to £10,500, with a removal of the £100,000 test which previously prohibited larger employers from claiming it.

Winners And Losers

The interaction of these changes will result in winners and losers, particularly in relation to the EA, which was significantly increased. The EA is an allowance for businesses (which meet certain criteria) to reduce their Employer’s NICs liability.

When she delivered the Autumn Statement 2024, Rachel Reeves said: “This will allow a small business to employ the equivalent of four full-time workers on the national living wage without paying any National Insurance on their wages.”

Let’s break that down. The national living wage (NLW) is the minimum hourly rate which must be paid to employees and workers over 21. Lower amounts apply to those under 21 or those in their first year of an apprenticeship. It’s worth noting that company directors, although treated as employees for tax purposes, are not required to be paid the NLW unless they have a separate employment relationship with the company.

For 2025/26, the NLW is £12.21 per hour, so for a full-time employee working 35 hours per week, that comes to £427.35 per week, or £22,222 per year. Employer’s NICs is calculated as 15% above the £5,000 threshold, so the tax due would be (£22,222 – £5,000) x 15% = £2,583.30. With four employees, the total NICs comes to £10,333.20 which would be covered by the £10,500 EA – meaning no employers’ NIC is due on their wages.

Of course, this is a simplification and does not take into account factors like overtime, benefits-inkind or paying annual or performance bonuses. It also assumes a 35-hour working week rather than, for example, a 37.5-hour or 40-hour week, which some people work. But it makes good rhetoric at the despatch box.

Do The Sums

Interestingly, the £5,000 threshold creates an incentive to employ more people for fewer hours. For example, if the business employed part-time workers for 20 hours per week, their pay at the NLW rate would be 20 x £12.21 = £244.20 per week or £12,698 per year, resulting in NICs of £1,155 per employee. They could employ nine part-time employees and still have the NICs covered by the £10,500 allowance. Employing part-time workers gives them 9 x 20 = 180 working hours per week rather than 4 x 35 = 140 hours per week with fulltime employees.

A similar principle applies for employees. If I have one job earning £36,000 a year, I would pay NICs of £1,874.40, but if I have three jobs each paying £12,000, I pay no NICs (unless certain ‘aggregation’ rules apply) because each job pays below the £12,570 primary Class 1 NICs threshold.

Points To Note

A couple of things to bear in mind relating to the EA:

• The EA has to be claimed each year via payroll software.
• It is available to most employers (including self-employed, partnerships, LLPs, companies, etc.).
• Single-director companies with no other employees cannot claim. You must have at least one other employee paid above the £5,000 threshold to qualify.
• You cannot claim for personal, household, or domestic staff.
• The allowance may have to be split between ‘connected companies’ depending on the circumstances.

Practical Tip

With the EA now worth £10,500 per year, make sure you are claiming it if you are eligible. You can also claim for previous years if you’ve missed an eligible claim in the past.