Smart Salary Planning: How to Use Employment Allowance to Your Advantage

Understanding the 2025/26 National Insurance Changes

From 6 April 2025, employer costs have increased sharply. The rate of Employer’s National Insurance Contributions (NICs) has risen from 13.8% to 15%, while the secondary threshold—the level of earnings above which NICs become payable—has dropped significantly, from £9,100 to £5,000 per year. This means employers now pay NICs on weekly earnings above just £96 (or £417 monthly).

Relief Through Employment Allowance

Thankfully, there’s some good news. For eligible employers, the Employment Allowance has increased to £10,500 for the 2025/26 tax year. This allowance can be set against the employer’s NIC bill. However, it is not available to companies where the only employee is also the sole director.

The NIC Cost on Small Salaries

Let’s break it down: for 2025/26, the lower earnings limit has increased to £125 per week. To earn a qualifying year for state benefits, an employee must earn at least £6,500 over the year. At this salary level, an employer would face a NIC liability of around £225 if they do not qualify for the Employment Allowance. Importantly, the employee pays no NICs themselves if earnings fall between the lower earnings limit and the primary threshold.

If a director chooses to take a salary equal to the personal allowance (£12,570), the employer’s NIC bill jumps to approximately £1,135.50—unless covered by the Employment Allowance.

Unlocking the Allowance: How to Qualify

So how can a small company access this allowance? The rule is simple: if the business incurs a secondary NIC liability for any employee other than the director, the company may claim the Employment Allowance.

Here are two ways to meet the eligibility criteria:

• Hire an additional worker: Even paying someone just £97 for a single week could make the company eligible. But to avoid suspicion, consider hiring a part-time worker, a student for summer work, or a spouse to support legitimate business tasks.
• Change in directorship: Another option is restructuring. If the sole employee resigns as a director and appoints a spouse or another person in their place, the company could qualify for the allowance.

Once eligible, the company can offset up to £10,500 against its NIC bill, making it possible to pay the director a full salary of £12,570 with no Employer NICs.

Final Thoughts

The increase in employer NICs can be costly, but with smart planning and a clear understanding of the Employment Allowance rules, small businesses and personal companies can reduce their burden. Whether it means adding a part-time team member or adjusting your company structure, these strategic moves could save over £1,100 in National Insurance in 2025/26.

Partner Note: National Insurance Contributions Act 2014, ss. 1 and 2.