Impact of NIC changes in 2025 for company directors
Posted on 11th December 2024
Changes to National Insurance Contributions (NICs) announced in the Autumn Budget are important for sole directors of limited companies. Here’s how it could affect you and your business.
Increased Class 1 NICs
The most immediate impact is that employers’ NICs go up from 13.8% to 15% in April 2025. As well as being a Director you are also an employee of your company. Class 1 employers’ NICs are paid through your payroll, based on your pay and bonuses. It doesn’t apply to dividends.
Employment Allowance
Employment Allowance is a government initiative allowing eligible employers to reduce their National Insurance liability by up to £5,000 in the current tax year. In April next year, this figure will increase to £10,500 of NICs.
It’s designed to support smaller businesses with employment costs by reducing employers’ Class 1 NICs. It applies until the full £5,000 allowance is spent or the tax year ends. Next year the allowance goes up to £10,500. It’s available to companies with employers’ Class 1 National Insurance liabilities of less than £100,000 in the previous tax year.
However, if you’re a sole director without other staff members you aren’t eligible for the Employment Allowance. If you’re receiving more than the secondary Class 1 NICs threshold, your contributions are automatically deducted. The difference is that next year the secondary threshold for Class 1 NICs goes down from £9,100 to £5,000. Your company will pay extra NICs on your pay over £5,000.
NICs payments for small businesses - example:
Sometimes an example can help to show what will happen. Most sole directors of limited companies take an annual salary of £9,100 or £12,570 to minimise NICs and income tax. A salary of £9,100 won’t attract any employers’ NICs this tax year because it’s below the secondary threshold. Next year is different.
|
Sole Director Annual Salary |
Employers’ NICs 2024/25 |
Employers’ NICs 2025/26 |
Additional NICs |
|---|---|---|---|
|
£9,100 |
£0 |
£615 |
£615 |
|
£12,570 |
£479 |
£1,136 |
£657 |
Comparison: Two directors
|
Two Directors’ Annual Salaries (each) |
Employers’ NICs 2024/25 (each) |
Employers’ NICs 2025/26 (each) |
Additional NICs (each) |
|---|---|---|---|
|
£9,100 |
£0 |
£615 |
£0 |
|
£12,570 |
£793 |
£0* |
-£793 |
*The first £5,000 of each salary is free of Employers’ National Insurance. The overall Employers’ NICs for these salaries for the year would amount to £2,271 (2 x 7,570 x 15%). However, because there are two working directors the company is eligible for the Employment Allowance up to £10,500.
What’s the most tax efficient director’s salary in 2025/26?
For the 2025/26 tax year, sole directors receiving £12,570 will pay marginally more NICs but will still have a qualifying pension year.
If you currently use a freelancer and pay them £5,000 or less you could consider adding them to your payroll from April 2025. You could then claim the Employment Allowance.
Preparing for Employers’ NIC increases
It’s not too soon to start preparing for the NIC increases. You should certainly review your payroll budgets to account for higher NICs rate and the reduced threshold. You might also need to consider the increased National Minimum Wage from April 2025 if this applies to some employees.
It’s worth asking your employees if they might prefer alternative part-time and flexible working patterns which could reduce your NIC liabilities.
Salary sacrifice schemes can also provide non-cash employee benefits and reduce NICs.
We can create a projection of the impact of NIC changes and increases to the NMW for your business.
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