The April 2025 employer NIC SME increase was framed as a manageable adjustment. Twelve months in, the real numbers tell a different story. Employer NICs rose from 13.8% to 15%, and the secondary threshold — the point at which employer NICs kick in — dropped from £9,100 to £5,000. For a five-person SME paying an average salary of £35,000, that is an extra £4,845 a year in employer NICs alone. Most business owners have absorbed this without running the maths on mitigation.
What Changed in April 2025, and What It Means Now
Two changes hit simultaneously. First, the employer Class 1 NIC rate increased from 13.8% to 15% — a 1.2 percentage point rise. Second, the secondary threshold dropped from £9,100 to £5,000 — meaning employers now pay NICs on a much larger slice of every salary. The secondary threshold for directors, for Class 1A NICs on benefits in kind, and for apprentices under 25 all moved in parallel. The Employment Allowance was raised to £10,500 as a partial offset, but it is capped and does not scale with headcount.
The policy has held steady through 2025/26 and continues into 2026/27. There is no scheduled reduction and no review pending. Businesses that assumed this was a temporary squeeze need to plan as if it is permanent. Further detail sits on the gov.uk NIC rates guidance.
The Real Employer NIC SME Cost Per Employee
Here is what the change actually costs at three common salary points:
| Annual Salary | NIC (old: 13.8%, £9,100 threshold) | NIC (new: 15%, £5,000 threshold) | Extra Cost per Year |
|---|---|---|---|
| £25,000 | £2,194 | £3,000 | £806 |
| £35,000 | £3,574 | £4,500 | £926 |
| £50,000 | £5,644 | £6,750 | £1,106 |
| £75,000 | £9,094 | £10,500 | £1,406 |
For a 15-person team averaging £35,000 each, the additional annual cost is £13,890. For a 5-person team on the same average, it is £4,630. Those numbers come before you account for the rise in National Living Wage (which pushed lower-paid salaries up in April 2026) or the pension auto-enrolment contribution increases under review.
Why Part-Time and Lower-Paid Staff Are Newly Affected
The old £9,100 threshold sat above the earnings of many genuine part-time employees. A 20-hour-a-week role on the National Living Wage often paid under the threshold, meaning zero employer NICs. The new £5,000 threshold is well below that level — so almost every part-time role now attracts employer NICs on some portion of the salary.
A part-time worker earning £15,000 would have triggered employer NICs of £814 under the old system. Under the new rules, that same role costs the employer £1,500 in NICs — an 84% increase on a single role that the business has probably not repriced.
Three Legal Employer NIC SME Mitigation Strategies
1. Salary Sacrifice for Pension Contributions
When an employee sacrifices salary in exchange for an equivalent employer pension contribution, the sacrificed amount is not subject to employer or employee NICs. On a £5,000 annual pension sacrifice across a five-person team, the employer saves £750 in NICs every year. The employee also saves on their own NICs, making it a straightforward shared win. HMRC accepts this arrangement provided the salary change is documented in an updated employment contract and the sacrifice is genuine (i.e. the employee cannot switch back mid-year without a lifestyle event).
2. Restructure Senior Pay Between Salary and Dividend
For owner-managed businesses, the salary-vs-dividend decision has shifted. With employer NICs at 15% and the dividend allowance at just £500, the optimum director salary is now typically around the £5,000 secondary threshold — enough to qualify for State Pension credits without triggering employer NICs. Profits above that come out as dividends. This is not a blanket answer — it interacts with pension contribution capacity, Employment Allowance eligibility, and mortgage application treatment of dividends — but for most director-shareholders, the balance has tipped further toward dividends.
3. Review Your Hiring Structure
Genuinely self-employed contractors do not attract employer NICs. Off-payroll working rules (IR35) have tightened repeatedly and the cost of getting this wrong is severe, but for work that is genuinely project-based with multiple clients, engaging contractors correctly removes the NIC cost entirely. The test is not what you call the relationship — HMRC looks at mutuality of obligation, control, and substitution rights. An SME with genuine need for specialist short-term input can legitimately use this route; one trying to disguise ongoing employment cannot.
Employment Allowance — Use It Properly
Eligible employers can claim up to £10,500 against their employer NIC bill. The allowance applies from your first NIC liability of the tax year and runs until exhausted. Check you are claiming it — around 15% of eligible SMEs do not, typically because their payroll software defaulted to ‘no claim’ at setup and has never been updated. You cannot claim if your employer’s NIC bill in the previous tax year was £100,000 or more, or if you are a sole director with no other employees.
The MTD for Payroll Compliance Angle
Making Tax Digital for payroll is now fully embedded in RTI. If your payroll system is not producing digital FPS and EPS submissions to the current HMRC schema, you are non-compliant — with penalties ranging from £100 to £400 per missed submission. Cloud-based payroll is now the baseline; legacy desktop software that has not been updated in 18 months will fail the current schema.
Common Mistakes
- Not updating the Employment Allowance claim annually — the £10,500 figure was £5,000 only two years ago, and many systems still use the old amount
- Applying salary sacrifice without a deed of variation to the employment contract — HMRC can disallow the NIC saving retrospectively
- Reclassifying an existing employee as self-employed to save NICs — this almost always fails an IR35 or employment status review
- Missing the secondary threshold change on directors’ remuneration — continuing to pay directors at the old £9,100 optimum instead of the new £5,000
- Absorbing NIC cost silently instead of repricing goods or services — a 15% NIC rate is a direct cost of employment that must sit in your gross margin
Key Takeaways
- Calculate the exact extra NIC cost for your current headcount — then do it again for your hiring plan
- Claim the £10,500 Employment Allowance if you are eligible
- Consider salary sacrifice for pensions as the lowest-risk, fastest-return mitigation
- Review director pay structure for 2026/27 — the optimum salary has moved
- Make sure your payroll software is on the current HMRC RTI schema
Next Steps for Your Business
We run a 60-minute payroll review that models the NIC impact on your current team, identifies Employment Allowance shortfalls, and stress-tests salary sacrifice and director remuneration structures for 2026/27. Most reviews uncover between £3,000 and £15,000 of avoidable cost for an SME of 5–20 employees.
Frequently Asked Questions
What is the current employer National Insurance rate?
Employer Class 1 NICs are 15% on earnings above the secondary threshold of £5,000 per year. The rate rose from 13.8% and the threshold dropped from £9,100 on 6 April 2025. These rates continue to apply in the 2026/27 tax year, with no scheduled reduction.
Does the Employment Allowance cover the whole increase?
No. The Employment Allowance of £10,500 offsets the first £10,500 of employer NICs each year, but for anything beyond 10 employees on average salaries it is quickly used up. After that, you pay the full 15% on all earnings above £5,000 per employee. Most SMEs with over 8 employees see the allowance exhausted by midyear.
How much does hiring someone now actually cost?
On a £35,000 salary, employer NICs add £4,500 a year, pension auto-enrolment adds around £720 (3% above the qualifying earnings floor), and apprenticeship levy may add 0.5% if you have a total pay bill over £3 million. The true cost of a £35,000 hire is typically £40,500–£41,500 before any other benefits.
Can salary sacrifice really reduce employer NIC SME costs?
Yes, if structured correctly. When an employee sacrifices salary for employer pension contributions, childcare vouchers (legacy schemes), or cycle-to-work benefits, the sacrificed amount is not subject to NICs. A £5,000 pension sacrifice saves the employer £750 a year in NICs. The arrangement must be documented in a contract variation and must be genuine — HMRC looks closely at schemes that swap salary back at will.
What is the best director salary for 2026/27?
For most owner-managed companies with only director-shareholders, the optimum director salary is now £5,000 — just at the secondary threshold — enough to maintain State Pension credit without triggering employer NICs. Additional income is taken as dividends. If the company has other employees and can claim Employment Allowance, a higher £12,570 salary often still works. Every situation needs checking against pension contribution plans and mortgage affordability.
