From April 2025, businesses across the UK will face increased National Insurance (NI) contributions, raising payroll costs and impacting cash flow. However, there’s some relief: the Employment Allowance will increase from £5,000 to £10,500, helping eligible businesses offset part of their NI bill.
With the employer NI rate rising to 15% and the NI threshold lowering to £5,000, businesses need a strategy to mitigate these rising costs. Whether you’re an employer, company director, or sole trader, planning ahead can save you money.
Let’s break down the changes and what you can do about them.
Key Changes Coming in April 2025
📈 Employer NI rate rising – The secondary Class 1 NI rate increases from 13.8% to 15%, meaning businesses will pay more NI on wages.
📉 Lower employer NI threshold – The threshold at which employers start paying NI will drop from £9,100 to £5,000, meaning a larger portion of salaries will be subject to NI.
💰 Employment Allowance increasing to £10,500 – Eligible businesses will be able to reduce their employer NI liability by up to £10,500 per year.
👥 Employee NI rates remain unchanged – No increase in employee contributions, but employer cost increases may affect pay rises, hiring, or benefits.
How the Lower Employer NI Threshold Affects Sole Directors
For sole directors, this change has an additional impact.
Currently, employer NI contributions typically start around November, as a director’s salary accumulates over the year before reaching the threshold. However, with the threshold dropping from £9,100 to £5,000, NI contributions will kick in much earlier in the tax year.
What This Means for You as a Sole Director:
- Expect to start paying employer NI sooner in the year (potentially from mid-summer instead of November).
- If you take a salary of £12,570, more of it will now be subject to employer NI at 15%.
- You may need to reconsider your salary and dividend mix to remain tax-efficient.
If your company does not qualify for the Employment Allowance (which excludes sole director companies with no other employees), you will have no relief from this increased NI burden. Strategic planning is essential to manage these extra costs.
How to Minimise the NI Increase
1. Maximise the £10,500 Employment Allowance
The Employment Allowance increase will reduce employer NI liabilities, helping offset the impact of rising rates.
Action: Ensure you’re claiming this through your payroll system if eligible. This allowance could cover NI costs on salaries up to approximately £70,000 per year for a single employee.
🔹 Note: If your company has only one director and no employees, you won’t qualify for this allowance. In that case, consider adjusting your salary structure to reduce NI liabilities.
2. Salary and Dividend Strategy for Directors
If you’re running a limited company, balancing your salary vs dividend split can help reduce your NI liability. Dividends aren’t subject to NI, so shifting more income into dividends (within tax-efficient limits) could lower your tax bill.
🔹 Example: Tayo, a company director, currently takes a salary of £12,570 and £37,000 in dividends. To mitigate the NI increase, he plans to slightly lower his salary and increase dividends while staying within tax-free allowances. This helps reduce overall tax exposure while maintaining compliance.
3. Salary Sacrifice: A Win-Win for Employers and Employees
A salary sacrifice scheme allows employees to exchange part of their salary for non-cash benefits, reducing their taxable income and NI contributions.
✅ Pension contributions
✅ Cycle-to-work schemes
✅ Electric car leasing
For employers, this strategy lowers total payroll costs and NI liabilities—a tax-efficient way to offer benefits without raising salaries.
4. Consideration for Sole Traders: Is It Time to Incorporate?
With higher NI contributions for sole traders, now might be the time to consider incorporation.
✅ Limited company benefits: More flexibility in taking income as dividends, which aren’t subject to NI.
❌ Additional responsibilities: More admin, accounting, and reporting requirements.
Action: Speak with an accountant to determine if incorporation is a better tax-efficient strategy for your income level.
5. Employee Benefits Instead of Pay Raises
With higher NI costs, businesses may need to rethink how they reward staff. Instead of pay rises, consider:
✅ Increased pension contributions (tax-efficient and NI-free)
✅ Health insurance or wellbeing perks
✅ Additional paid leave or flexible working arrangements
These benefits retain employees while keeping employer NI costs manageable.
Final Thoughts for Different Business Structures
🔹 Sole Directors
- You will start paying employer NI sooner in the tax year due to the lower threshold.
- If your business doesn’t qualify for the £10,500 Employment Allowance, employer NI at 15% on earnings over £5,000 will hit you harder.
- Consider restructuring your salary and dividend mix to reduce NI liabilities.
🔹 Companies with More Than Two Employees
- The £10,500 Employment Allowance can significantly offset the NI increase, making it easier to manage rising payroll costs.
- Salary sacrifice schemes and pension contributions can help reduce employer NI liabilities while still offering competitive employee benefits.
- Review hiring plans—with higher employer NI, factor this into your long-term recruitment and salary budgeting.
Key Takeaway
With employer NI rates rising and the threshold lowering, payroll costs will increase significantly for many businesses. However, the Employment Allowance increase to £10,500 offers valuable relief for companies with multiple employees.
If you’re a sole director, expect NI costs to hit earlier in the year, making strategic income planning even more important.
By reviewing salary structures, leveraging tax-efficient benefits, and claiming the Employment Allowance, businesses can stay ahead of the changes and reduce their NI burden.
