How company directors can offset employer NIC rising to 15%

Effective from April 6th 2025, the chancellor announced at Autumn Budget 2024 that employers will pay more in national insurance contributions for their employees, writes Jon-Marc Spatcher, group managing director at The Affinity Group, parent company of SG Accounting.

Who is affected by the employer NICs rise?

This increase in employer NICs from Rachel Reeves is expected to have consequences for various stakeholders, including businesses of all sizes, workers employed through umbrella companies, and limited company contractors (also known as personal service company contractors).

For businesses, employer’s National Insurance rising to 15% will likely lead to higher operational costs, potentially affecting profitability and the ability to invest in growth.

Workers in umbrella companies, who often rely on flexible employment arrangements, may find their take-home pay reduced as employers adjust to the new financial demands.

What does employer NICs at 15% mean for limited company directors?

Similarly, PSC or limited company contractors who operate through their incorporated business (often offering specialised services), might face challenges in negotiating contracts and maintaining their income levels.

The ripple effects of the adjustment to the employer’s National Insurance increase are anticipated to be at least three-fold.

In particular, we expect the employer to NICs rise to influence hiring practices, wage structures, and overall economic activity, prompting stakeholders to reassess their financial strategies.

National Insurance changes from April 6th 2025 be like…

To recap on Autumn Budget’s three main employer’s national insurance changes (all of which take effect from April 6th 2025):

1. Employer's national insurance rate will increase from 13.8% in 2023-24 to 15% for 2025-26.
2. Employer’s Class 1 national insurance secondary threshold will reduce to £5,000 per year (from £9,100 per year currently).
3. The National Insurance Employment Allowance will increase to £10,500 (versus £5,000 currently).

To tackle the impending increase in employer NICs, there are six steps you may want to consider taking if you are a limited company director hoping to offset the increase:

Step 1: Optimise salary and dividends

Salary: Pay a salary up to the secondary National Insurance Contributions (NIC) threshold. For the 2025-2026 tax year (commencing April 6th 2025), this threshold is £5,000.

What’s the benefit? By keeping your limited company director salary at or below this threshold, no employer NICs are payable. This is a tax-efficient way to receive income for many contractors.

Dividend payments: Dividends are distributions of a limited company's profits to its shareholders and are not subject to NICs.

What’s the benefit?: Paying dividends, where they are available to be paid, reduces the overall NIC burden because dividends do not attract NICs, unlike salary.

Moreover, dividends are typically taxed at a lower rate than salaries, providing additional tax savings.

Taxation: While dividends are subject to income tax, dividend rates are generally lower than those applied to salaries.

For the 2024-2025 tax year, the dividend tax rates are as follows (and will remain the same from April 6th 2025):

1. Basic rate: 8.75% for income within the basic rate band.
2. Higher rate: 33.75% for income within the higher rate band.
3. Additional rate: 39.35% for income within the additional rate band.

Dividend allowance: There is also a dividend allowance which means the first £500 of dividend income is tax-free.

Step 2:  Use Employment Allowance (if eligible)  

The Employment Allowance currently allows businesses with employer NICs bills of £100,000 or less in the previous tax year to deduct £5,000 from their employer NICs bill.

The chancellor used Autumn Budget 2024 to increase the Employment Allowance from £5,000 to £10,500.

On October 30th 2024, Reeves also said the government would remove the £100,000 threshold for eligibility, thereby expanding the EA to all eligible employers with employer NICs bills from April 6th 2025.

Eligibility: Check if your limited company qualifies for the Employment Allowance, which allows eligible businesses to reduce their NICs bill from HMRC by up to £5,000 a year. Please note -- the Employment Allowance is not available if you're the sole employee and director of the company.

Step 3: Give Benefits-in-Kind a good second look

Tax-efficient benefits: Given the potentially significant impact of employer National Insurance of 15% (up from 13.8% currently), company directors should actively consider offering benefits-in-kind that are tax-efficient and not subject to NICs, such as :

• company cars with low CO2 emissions;
• health insurance;
• childcare vouchers.

Step 4: Make or notch up tax-efficient pension contributions

Employer contributions: Employer pension contributions are not subject to National Insurance Contributions.

As a result, employer pension contributions can be a tax-efficient way for directors to save for retirement and ultimately, utilise the profits within their business.

Step 5: Adjust working practices

Re-evaluate contracts: If you and your limited company (or PSC) work with multiple clients, consider renegotiating your contracts to increase your fees or day rate, to reflect the additional costs incurred due to higher NICs.

Step 6: Employ tax planning and efficiency

Tax advice: Work with a contractor tax adviser to explore other tax-efficient strategies tailored to your specific situation and circumstances. The best tax adviser will guide you on maximising allowances and reliefs.

Lastly, do the math (or let us do it for your limited company), but be speedy

Labour’s increase in employer NICs, via a higher rate and lower threshold, kicks in just 17 weeks from today. And to provide you with a sense of the extremely large impact that the move will exert, it will raise for the Treasury some £26billion by 2029-30. And that’s before allowing for ‘indirect effects on the economy,’ as the OBR puts it.

Almost needless to say, Labour’s employer NICs rise, taking this levy to 15%, signals a major change in the government's financial approach. It may signal a change in your limited company’s financial approach too. Whenever you need to consider aspects of your personal tax affairs as well as those related to your limited company, our practice of accountants is ready to pinpoint all the options you have available, both in the lead-up to this change in just 119 days’ time and after it as well.