Changes to NI and Employment Allowances

The government has made various changes to employer national insurance contributions (NICs) as of 6th April 2025.

Two of the changes result in big increases:

• Reducing the employer’s secondary Class 1 national insurance threshold from £9,100 to £5,000 per annum, and
• Increasing the main rate of employers’ secondary Class 1 national insurance contributions from 13.8% to 15%. The Class 1A and Class 1B employer rates, which apply to taxable benefits-in-kind, will also increase in line with this.

Another change, but one which is in partial compensation for the above increases, is the government increasing the generosity of the Employment Allowance in two ways:

• all employers will be able to claim the Employment Allowance (rather than just employers who have incurred an employer NICs liability of less than £100,000 in the tax year prior), and
• The amount each employer can save will rise from £5,000 to £10,500.

Can all businesses claim the Employment Allowance?

No, there are various restrictions.  The allowance may be denied depending on the type of business and the nature of the work carried out, or whether any connected companies are claiming the Employers Allowance already.

Many tax advisors and payroll managers are frequently asking about owner-managed limited companies where there is a sole director and perhaps only one or two employees.  HMRC have published several examples when a company is, or is not, able to claim the employment allowance, for example:

Limited company with one director and several employees, where the employees are paid below the secondary threshold

Mrs M, the director of M Ltd, is paid above the secondary threshold. She has 4 employees, none of whom earn above the secondary threshold. M Ltd is not eligible to claim the Employment Allowance.

A limited company who is initially unable to claim Employment Allowance in the relevant tax year, as only the director earns above the secondary threshold, but then pays a further employee above the secondary threshold and becomes eligible.

X Ltd is a company which employs a single paid director, Mr X, with no other employees. X Ltd will not be eligible to claim the Employment Allowance from April. In June Mr X takes on a further employee, Mrs Y. Mrs Y is paid more than the secondary threshold. X Ltd is now eligible to claim the Employment Allowance for the tax year. If Mrs Y becomes a director of X Ltd, her annual earnings must be above the annual secondary threshold or the pro-rata equivalent to claim the Employment Allowance.

Limited company where the director earns below the secondary threshold but an employee does not

J Ltd is a company which has one director and two other employees. The sole director, Mr L, and another employee, Miss K, both receive earnings from J Ltd that fall below the secondary threshold. The other employee, Mrs J, earns above the secondary threshold. JKL Ltd will be able to claim the Employment Allowance.

Limited company with two directors, where both are paid above the secondary threshold

Q Ltd employs two paid directors. Both are paid above the secondary threshold. The company is eligible to claim the Employment Allowance for the whole tax year.

If a limited company’s circumstances change during the year so that the company has more than one employed earner earning above the secondary threshold, your company can become eligible for the Employment Allowance for the whole year.

I run a single-director/employee company – should I just pay myself £5,000 so my company avoids any employer’s NIC?

No, not always. This is because payment of NICs, or being treated as having paid them, at a certain level can build up your entitlement to the state pension and to other contributory benefits, such as contributions-based jobseeker’s allowance, contributory employment and support allowance, maternity allowance, and bereavement benefits.

How does the amount of National Insurance I pay affect my state pension entitlement?

A single-component flat-rate state pension replaced the two-component system for individuals who reach state pension age on or after 6 April 2016. The latest rules provide, broadly, that to get a full state pension, an individual must have paid or have been credited with Class 1, 2 or 3 NICs on an amount equal to 52 times the lower earnings limit in each of 35 ‘qualifying years’ of working life. The lower earnings limit for the 2025/26 tax year is £125 per week, or £6,500 per year for company directors.

In short, if you pay yourself less than this amount, then this will not give you a NIC credit for the year, and this may compromise your entitlement to the benefits mentioned earlier in this article.

If you need any assistance in this or any other matter, please feel free to contact the Vantage Tax Advice Team.

Tax Advisor
Jack Hurren

For more information, please contact us at: consultancy@vantagefeeprotect.com