Employers National Insurance and the Employment Allowance – the impact on your business
Employers National Insurance and the Employment Allowance was changed substantially in the recent Budget. It’s important to understand the impact for businesses, especially small and medium-sized enterprises because financially this change could be significant.
Understanding Employers National Insurance
Employers National Insurance is a mandatory tax paid by employers for all employees who are earning about a certain amount.
Current thresholds and rates
Since the Autumn Budget, employers National Insurance has been increased from 13.8% of salary to 15% of salary. This is a significant increase and is likely to make a dent in organisations’ profitability since there’s no way to avoid this extra overhead.
The threshold at which NI must be paid has dropped from £9,100 per year to £5,000 per year, bringing thousands more part-time workers into scope for employers NI.
Impact on business costs
The higher percentage and lower threshold represent a significant increase in costs for businesses.
It is likely to make a dent in organisations’ profitability since there’s no way to avoid this extra overhead.
The Employment Allowance Explained
Despite the increased rates and reduced thresholds, the news wasn’t all bad in the Budget as the Chancellor also choose to increase the Employment Allowance.
What is the employment allowance?
The Employment Allowance is a relief to help business owners manage their Employers NI costs. In 2024/25, the Employment Allowance was £5,000 which helped to reduce NI costs for small businesses, charities and other non-profits. This allowance was increased to £10,500 in the 2024 Budget and will come into effect on 1 April 2025 for the 2025/26 tax year.
Eligibility criteria for businesses
In the current tax year 2024/25, to be eligible for the Employment Allowance, a business must have a total NI liability under £100,000 in the previous tax year. However, in 2025/26, this £100,000 limit is being scrapped so more businesses can claim this relief.
Employment Allowance is not available for limited company directors where the company only has one employee.
Claiming the Employment Allowance
It’s straightforward to claim the Employment Allowance and it can be done through your regular payroll feed at any time during the tax year to suit you.
Using HMRC’s Real Time Information (RTI) system
You can indicate ‘Yes’ in the ‘employment allowance indicator’ field in most payroll software systems which enables you to claim the allowance. This is done when submitting your Employer Payment Summary (EPS) to HMRC. Alternatively, you can use HMRC’s Basic PAYE Tools to make the claim if your payroll software does not have this functionality.
The Impact Of Higher NI and Lower Employment Allowance
Let’s run through a few scenarios to look at the impact of these changes.
| Scenario | Description | 2024 Tax Year | 2025 Tax Year | Impact |
| 1 | Single Director Limited Company Contractor | Salary: £9,096 No Employers' NI | Salary options: a) Lower salary, higher dividends b) Higher salary with Employers' NI No Employment Allowance |
Increased tax burden of at least £260 per year |
| 2 | Limited Company with Two Directors | Salary: £9,096 No Employers' NI | Salary: £12,570 each Employers' NI bill: £2,271 Employment Allowance: £10,500 Net Employers' NI: £0 | No Employers' NI due to increased Employer's Allowance |
| 3 | Small Business (6 workers on £12.50ph + director on £12,570) | Employers' NI: £6,988 (after £5,000 allowance) | Employers' NI: £6,835 (after £10,500 allowance) | Slight decrease in Employers' NI due to increased allowance |
| 4 | Medium Business (150 workers) on average salary of £38,000 | Employers' NI: £598,230 No Employer's Allowance | Employers' NI: £732,000 Eligible for £10,500 allowance |
Increase of £133,770 (22%) in Employers' NI |
So, these examples show that smaller businesses might not be impacted much by the changes to Employer NI and the Employment Allowance but overall, the taxation burden will be significantly higher in 2025 for many bigger businesses.
Contact Adams Accountancy
Are you worried about the impact of Employers’ National Insurance?
The Budget brought in a lot of changes impacting small and medium sized business and it can be challenging to work through them all to assess the likely impact to your bottom line. If you’d like to discuss your situation and how you can adjust things in your business to minimise your tax liability, contact us for a free, no-obligation chat today.
