Following the Autumn Budget in 2024, the new National Insurance (NI) changes are coming into effect from 6 April 2025. It’s important to understand how these adjustments will impact your business. Whether you’re a sole director of a limited company or running a business that qualifies for Employment Allowance, these updates are likely to affect your tax efficiency and payroll obligations.
Key Changes to Employers’ NIC
- Increase in Employers’ NIC Rate: From 13.8% to 15%. This will apply to all employees earning above the Secondary Threshold (£5,000).
- Threshold Adjustments: Changes to the threshold at which employers begin to pay NI, meaning the earnings level at which employers are required to make contributions will be adjusted down from £9,096 to £5,000.
- Increase In Employers Allowance –The employer’s allowance will increase from £5,000 to £10,500.
Impact on Sole Directors of Limited Companies
A sole director company, will not qualify for the Employment Allowance, meaning careful remuneration planning is essential. Below are three salary options for 2025/26, illustrating the tax and NIC implications:
Option 1: £5,000 Annual Salary
✔ No personal tax obligations (covered by Personal Allowance).
✔ No Employers’ or Employees’ NIC payable.
✖ Below the Lower Earnings Limit (£6,500), meaning no qualifying year for State Pension.
Option 2: £6,500 Annual Salary
✔ No personal tax obligations.
✔ Qualifies as a contributing year for the State Pension.
✖ Employers’ NIC of £225 payable (offset if eligible for Employment Allowance).
Option 3: £12,570 Annual Salary
✔ Fully utilises Personal Allowance, meaning no income tax.
✔ Qualifies as a contributing year for State Pension.
✖ Employers’ NIC of £1,136 payable (offset if eligible for Employment Allowance).
Which Option is Best?
- If you want to avoid payroll liabilities, Option 1 is ideal, but you miss out on a qualifying year.
- If you want the cheapest way to maintain your State Pension contributions, Option 2 is preferable.
- If you want to fully utilise your tax-free allowance and reduce Corporation Tax, Option 3 may be best (provided Employment Allowance applies).
Employment Allowance & Companies with Employees
For businesses with employees, the Employment Allowance increase to £10,500 provides additional tax relief by offsetting NIC liabilities. This is only applicable if your company has employees beyond directors.
How the Employment Allowance Helps:
- If your business qualifies, you can reduce Employers’ NIC by up to £10,500 per year.
- This allows for higher tax efficiency when structuring salaries for employees.
- It offsets the increased Employers’ NIC rate of 15%.
Alternative Ways to Extract Profits
If you wish to minimise NIC liabilities, consider:
- Dividends: Tax-efficient compared to salary payments.
- Company Pension Contributions: Corporation tax-deductible and beneficial for long-term financial planning.
- Reimbursement of Business Expenses: Ensuring all allowable expenses are reimbursed tax-free.
Disclaimer
The options above are provided as a guide and do not factor in any additional income sources you may have, such as dividends, property, or pension income.
Unfortunately, there is no one-size-fits-all approach, as everyone’s situation differs depending on their other sources of income and whether they have reached their qualifying State Pension years. Therefore, this guidance should be considered alongside your personal tax situation.
Next Steps – What Do You Need to Do?
Please inform your payroll support which is your preferred salary option by 7 April 2025, that will allow your payroll team enough time before the first pay run of the new tax year.
If you require tailored remuneration planning, or looking to discuss your company’s NIC strategy, please contact us.
We’re here to help you remain as tax-efficient as possible during these changes.