If you employ staff and your payroll costs feel noticeably higher than they did two years ago, you are not imagining it. From April 2025, the rate of employer National Insurance Contributions (NICs) rose from 13.8% to 15%, and the threshold at which you start paying it dropped from £9,100 to £5,000 per year. That combination hit small businesses hard, and a year on, many employers are still absorbing the impact. This article explains exactly what changed, what it means for your payroll bill in 2026, and what options you have to manage the cost.
What Changed With Employer National Insurance From April 2025?
The changes were announced in the Autumn Budget 2024 and came into effect on 6 April 2025. They affected virtually every employer in the UK who pays wages above the secondary threshold.
| Detail | Before April 2025 | From April 2025 |
|---|---|---|
| Employer NI rate | 13.8% | 15% |
| Secondary threshold (annual) | £9,100 | £5,000 |
| Employment Allowance | £5,000 | £10,500 |
| Employment Allowance eligibility cap | Class 1 NI liability under £45,000 | Class 1 NI liability under £100,000 |
The rate increase of 1.2 percentage points does not sound enormous on its own. But the drop in the secondary threshold means you are now paying employer NI on a much wider band of each employee’s wages. You start paying it once their earnings pass £5,000 a year rather than £9,100. For most employers, those two changes together have resulted in a meaningful increase in their annual payroll costs.
Our post on the autumn budget 2025 summary covers the wider set of changes that came out of the recent budget period if you want a broader picture of how fiscal policy has affected business costs.
How Much More Are You Actually Paying?
Let us run through a straightforward example to show what the numbers look like in practice.
Take an employee earning £28,000 a year.
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Before April 2025: Employer NI = 13.8% x (£28,000 – £9,100) = 13.8% x £18,900 = £2,608.20
From April 2025: Employer NI = 15% x (£28,000 – £5,000) = 15% x £23,000 = £3,450.00
That is an increase of £841.80 per year for just one employee on a relatively modest salary. Multiply that across a team of five employees and you are looking at over £4,200 in additional employer NI per year, before accounting for any increase in the wages themselves.
For businesses with larger payrolls, the numbers are considerably bigger. Understanding your actual exposure is something that good financial report services can help you model clearly, so you are not just feeling the pain without knowing exactly where it is coming from.
What Is the Employment Allowance and Can You Claim It?
The Employment Allowance is a relief that allows eligible employers to reduce their employer NI bill by up to £10,500 per tax year. It was doubled in April 2025 from £5,000, partly in recognition of the impact the NI rate rise was having on smaller businesses.
| Employer Type | Employment Allowance Eligibility |
|---|---|
| Small businesses with multiple employees | Eligible if total Class 1 NI liability was under £100,000 in the previous tax year |
| Sole director companies with no other employees | Not eligible |
| Charities | Eligible |
| Domestic employers (e.g. hiring a carer at home) | Not eligible |
| Public bodies | Not eligible in most cases |
If you are eligible, the allowance is applied automatically through your payroll software each time you run payroll, reducing your employer NI bill until the £10,500 limit is used up for the year. You do not receive a refund for unused allowance, so it works best for employers whose annual NI bill is at or above the allowance amount.
The key exception to watch out for is sole director companies. If you are the only employee of your own limited company, you cannot claim the Employment Allowance. This catches a surprising number of small business owners who assume they are entitled to it.
If you are unsure whether your business qualifies or whether you have been claiming it correctly, this is exactly the kind of thing that accountant payroll services can help you confirm and correct.
The Double Hit: NI Rises and Minimum Wage Increases Together
The employer NI changes did not arrive alone. April 2025 also brought a significant increase to the National Living Wage and the National Minimum Wage, which was announced in the same budget.
From April 2025, the National Living Wage for workers aged 21 and over rose to £12.21 per hour. That is a meaningful uplift on top of already rising pay expectations. For businesses with lower-paid workers, the combination of higher minimum wages and higher employer NI on those wages has squeezed margins from both directions.
Our post on minimum living wage from April 2025 covers the rate changes and what they mean for your payroll in detail.
The interaction between wages and employer NI matters because higher wages mean more of each employee’s pay is above the secondary threshold, which means even more NI to pay. If you have increased wages to meet the new minimums, your NI bill has risen for two reasons simultaneously.
How This Affects Different Types of Business
The impact varies depending on your size, structure, and the wages you pay.
Small businesses with a handful of employees
If your total employer NI bill is under £10,500, the increased Employment Allowance should cover or significantly offset your liability. However, the secondary threshold drop still means you are paying NI on more of each employee’s wages than before, and the allowance does not change that calculation.
Businesses with larger headcounts
The Employment Allowance provides a fixed saving regardless of how many employees you have. For a business with 20 or 30 staff, the £10,500 allowance covers only a fraction of the total NI bill, and the full weight of the rate rise is felt.
Director-only limited companies
As noted above, sole director companies cannot claim the Employment Allowance. The increase in employer NI applies to any salary paid above £5,000, which makes the choice of salary level more financially significant than it was previously. Our post on director pay: salary vs dividends is essential reading if you are a director looking at how to structure your own pay tax-efficiently in light of the new rates.
Businesses using subcontractors
If you use subcontractors in construction or similar trades, you may have some flexibility around whether you engage people as employees or subcontractors. The Construction Industry Scheme governs the latter, and our post on CIS for contractors: a checklist covers how that works. Getting the classification wrong can be costly, so it is worth making sure your arrangements are properly structured.
Payroll Admin: What Employers Are Required to Do
Running payroll correctly is a legal obligation, not just an administrative nicety. Every time you pay employees you need to calculate the right income tax through PAYE, deduct employee NICs at the correct rate, calculate employer NICs, submit a Full Payment Submission (FPS) to HMRC on or before pay day, and pay HMRC what you owe by the 19th or 22nd of the following month.
If you are also auto-enrolling eligible employees into a workplace pension, you have pension contributions to manage on top of all of this. Our post on national insurance contributions gives a clear overview of how the contributions system works across both employee and employer rates.
Getting payroll wrong, even unintentionally, can lead to HMRC penalties. Accurate bookkeeping service for small business goes hand in hand with payroll, because the two need to reconcile correctly in your accounts each month.
Holiday Pay and Other Hidden Payroll Costs
Employer NI is the headline number, but it is not the only payroll cost that has risen. Holiday pay obligations remain a significant additional cost on top of gross wages, and the rules around how to calculate it correctly are more complex than many employers realise, particularly for workers with irregular hours.
Our post on understanding the calculation of holiday pay covers the rules in full and is worth reading if you have any employees on variable hours, zero-hours contracts, or shift patterns.
Strategies to Manage Your Payroll Costs Legally
There is no way to avoid employer NI if you are paying wages above the secondary threshold, but there are legitimate ways to manage the overall cost of employment.
- Claim the Employment Allowance if you are eligible and have not already done so
- Review your director salary level in light of the new NI thresholds
- Consider the most tax-efficient way to structure any bonuses or additional pay
- Make sure your payroll software is calculating NI correctly, particularly around the secondary threshold
- Review whether any workers are correctly classified as employees or self-employed
- Use management reports to track payroll costs as a proportion of revenue each month
That last point matters more than people often realise. If payroll is consuming an increasing share of your revenue, the earlier you spot it, the more options you have. Our post on cash flow forecasting for small businesses is a useful tool for building this kind of visibility into your finances.
How Technology Is Changing Payroll Management
Cloud-based payroll software has made a significant difference for small employers, automating much of the NI calculation and FPS submission process. As certified QuickBooks ProAdvisors, we work with payroll and accounting tools that keep these calculations accurate and up to date as rates change. Our post on the rise of AI automation in accounting looks at how technology is changing the day-to-day reality of financial management for small businesses.
What This Means for Your Company Accounts
Higher employer NI feeds directly into your profit and loss account. It is a staff cost that reduces your taxable profit, which does at least mean it generates some corporation tax relief. But the cash impact is real regardless of the tax treatment. Making sure your accountants for company accounts are reconciling payroll costs accurately in your statutory accounts matters for giving you and HMRC an accurate picture of your financial position.
If you want to understand how the wider cost environment is affecting your business profitability, our post on financial data analytics is driving better decisions covers how data-driven reporting is helping businesses make smarter choices.
How Asmat and Co Can Help
As trusted accountants based in Slough, we handle payroll for small and medium-sized businesses across the area. We make sure your employer NI is calculated correctly every pay period, your Employment Allowance is claimed if you are eligible, your FPS submissions go to HMRC on time, and your payroll costs are properly reflected in your accounts.
We provide accounting services for small business clients across a wide range of sectors, and payroll is just one part of a broader service that includes company accounts, VAT, bookkeeping, and tax. If you are also an accountant for sole trader clients who is thinking about taking on their first employee, we can help you understand exactly what the additional costs will look like before you commit.
If you need accountants for tax returns support alongside your payroll, we handle both under the same fixed monthly fee so there are no surprise bills.
We also work with businesses based further afield. Our team of accounting firms in reading provide the same complete service to clients across Berkshire.
Our post on what an accountant does for an SME is worth a read if you want a realistic picture of what professional support looks like day to day.
Frequently Asked Questions
Has the employer NI rate changed again for 2026/27?
No further rate changes were announced for April 2026 beyond those that came into effect in April 2025. The rate remains at 15% with a secondary threshold of £5,000 for the 2025/26 and 2026/27 tax years unless further budget announcements change this. Always check with your accountant ahead of the new tax year.
Can I avoid employer NI by paying everyone dividends instead of wages?
You can only pay dividends to shareholders, not to employees as a substitute for wages. Misclassifying employment income as dividends is treated as tax avoidance. Directors who are also shareholders can legitimately take a combination of salary and dividends, but this does not apply to general employees.
What happens if I do not pay my employer NI to HMRC on time?
HMRC charges interest on late payments and can issue penalty notices. If you miss payments repeatedly, they can escalate to enforcement action. It is one of the obligations that needs to be treated as a non-negotiable monthly commitment.
Does employer NI apply to pension contributions?
No. Employer pension contributions are not subject to NI. This is one reason why salary sacrifice pension arrangements can be tax-efficient for both employer and employee, as contributions made through salary sacrifice reduce the wage on which NI is calculated.
I run a small business and have just taken on my first employee. Where do I start?
You need to register as an employer with HMRC before your first pay day, set up payroll software, assess your employee for auto-enrolment pension purposes, and start making the correct deductions and submissions from day one. Our payroll services cover all of this from the outset.
Does the Employment Allowance reset every tax year?
Yes. The Employment Allowance is an annual relief and your entitlement resets at the start of each new tax year on 6 April. You need to make sure your payroll software is set to claim it at the start of each year if you are eligible.
How does employer NI interact with the Construction Industry Scheme?
If you engage workers as subcontractors under CIS rather than employing them, you do not pay employer NI on their payments. However, HMRC scrutinises the boundary between employment and self-employment in construction closely. Our post on understanding the importance of CIS registration covers the rules around this.
Get Your Payroll Right From the Start
Employer National Insurance is now one of the most significant costs of having employees. Getting the calculations right, claiming every relief you are entitled to, and keeping your payroll submissions accurate and on time is not something to leave to chance.
If you would like to hand your payroll over to a team you can rely on, or if you just want a second opinion on whether you are managing it correctly, speak to Asmat and Co today.
Need Help With Your Accounts Or Tax?
Whether you need support with self assessment, VAT returns, payroll, bookkeeping, CIS, company accounts or corporation tax, Asmat & Co Accountants can provide clear, practical advice for your business or personal finances.
