Employer NI at 15%: the real impact on UK contractors

The April 2025 budget delivered the largest single increase to employer National Insurance in modern UK tax history: a 1.2 percentage-point rate rise (from 13.8% to 15%) combined with a £4,100 reduction in the secondary threshold (from £9,100 to £5,000 per year). Together, these changes hit Limited Company contractors paying themselves a salary and umbrella workers whose assignment rates absorb employer NI costs. This guide explains the mechanics, quantifies the cost at different salary levels, and explains the strategic responses still available in 2026/27.

What employer NI is and who pays it

Employer National Insurance Contributions (Class 1 Secondary NIC) are a payroll cost levied on employers — paid by the company, not the employee — on wages above the secondary threshold. The employee's payslip does not show employer NI; it appears in the company's accounts as a cost of employment.

For a Limited Company contractor director who is also an employee of their own company, this means:

• The company pays employer NI on the director's salary above the secondary threshold
• The director's personal income is unaffected (they receive the salary; the company bears the NI cost from its own funds)
• Employer NI is a deductible business expense — it reduces company profit before corporation tax is calculated

The key 2025/26 parameters (unchanged for 2026/27):

• Rate: 15% (was 13.8% before 6 April 2025)
• Secondary threshold: £5,000/year (was £9,100/year before 6 April 2025)
• Upper secondary threshold: Not applicable for standard employees

The double hit on a standard director salary

The most common director salary is £12,570 — the personal allowance threshold — because it generates no income tax for the director and (before April 2025) minimal employer NI.

Before April 2025 (2024/25):

• Employer NI on £12,570 salary = (£12,570 − £9,100) × 13.8% = £3,470 × 13.8% = £478.86/year

From April 2025 (2025/26 onwards):

• Employer NI on £12,570 salary = (£12,570 − £5,000) × 15% = £7,570 × 15% = £1,135.50/year

Increase: £656.64/year — more than double the previous cost.

This increase is a direct hit to company profit. It means £656.64 more leaves the company each year purely in employer NI before any profit extraction can occur.

For a contractor earning £100,000/year in fees, the employer NI increase on the director salary alone reduces distributable profit by £657/year — equivalent to roughly one day's fees at a typical IT contractor rate. It's not catastrophic, but it's real money.

Cost at different salary levels

The £12,570 salary is a common starting point, but some directors draw higher salaries (for pension contribution base, mortgageability, or Employment Allowance reasons). Here is the employer NI cost at various salary points for 2026/27:

| Gross salary | Employer NI (2025/26+) | Employer NI (2024/25) | Increase | |---|---|---|---| | £5,000 | £0 | £0 | £0 | | £9,100 | £615 | £0 | £615 | | £12,570 | £1,136 | £479 | £657 | | £20,000 | £2,250 | £1,506 | £744 | | £30,000 | £3,750 | £2,886 | £864 | | £50,000 | £6,750 | £5,651 | £1,099 | | £75,000 | £10,500 | £9,124 | £1,376 |

The increase compounds at higher salaries because both the rate change and the threshold change apply to the full salary above £5,000.

The umbrella contractor impact

For umbrella contractors, employer NI is embedded in the assignment rate — the gross rate the agency or client pays to the umbrella company. The umbrella deducts:

1. Its margin (typically £20–£35/week)
2. Employer NI (15% on wages above £5,000/year threshold)
3. Apprenticeship Levy (0.5% on all wages above £3,000/year)
4. Then PAYE income tax and employee NI on the remainder

The April 2025 employer NI changes increased the umbrella's cost of employment, which either:

• Reduces the gross taxable wage paid to the contractor (if the assignment rate is fixed), or
• Is passed back to the client via a rate increase (if the contract allows)

Most umbrella contractors saw their take-home reduce by approximately £50–£100/month from April 2025, as the higher employer NI cost was absorbed into the wage calculation. A contractor on a fixed £500/day assignment rate through an umbrella would have seen their effective gross daily wage fall by approximately £2–£4/day due to the increased employer NI levy.

The Employment Allowance: why most single-director companies don't qualify

The Employment Allowance lets eligible employers offset up to £10,500/year of their employer NI bill against the government's liability (from April 2025; was £5,000 before). It is a significant relief — at the £10,500 cap, it effectively waives employer NI on the first £70,000 of wage bill.

However, single-director companies where the director is the sole employee do not qualify for Employment Allowance. The legislation specifically excludes companies whose only employee is also the director.

Companies that do qualify:

• A Limited Company with at least one non-director employee (even part-time)
• Umbrellas and agencies (on their own employment costs)
• Partnerships with employees

For most solo contractors, Employment Allowance is not available — and the full £1,135.50/year employer NI on the £12,570 director salary applies.

If your company employs even a single additional person (an administrator, a bookkeeper engaged as an employee rather than a contractor), Employment Allowance eligibility may open up. See our guide on optimal director salary when you can claim Employment Allowance for the maths.

Why pension contributions become more attractive post-April 2025

The employer NI increase strengthened the case for employer pension contributions as an alternative to salary.

When your company makes an employer pension contribution:

• No employer NI is payable on the contribution amount (pensions are exempt)
• Corporation tax relief applies at 25% on the contribution (reducing taxable profit)
• No income tax in the director's hands (pension contributions are not a taxable benefit in kind)
• The money grows in a pension wrapper until retirement

Versus paying an additional £1,000 in salary:

• Employer NI: £150 (15%)
• Corporation tax relief on the gross salary + employer NI: 25% on £1,150 = £287.50
• Income tax on the employee's side: 20% basic rate (or 40%/45% at higher rates) on £1,000
• Net effective cost to company per £1,000 additional salary: approximately £862.50 after CT relief

For pension vs salary, the pension is always cheaper to the company once employer NI is factored in — and post-April 2025, that spread widened by 1.2 percentage points.

See our contractor pension strategy for 2026/27 guide for worked examples of employer pension contributions.

The optimal salary calculus in 2026/27

The April 2025 changes shifted the breakeven analysis for director salary:

At £12,570 (personal allowance):

• Employee income tax: £0 (covered by personal allowance)
• Employer NI: £1,135.50 (15% on £7,570)
• Net benefit of salary vs dividend at £12,570: salary is still broadly efficient because the personal allowance saving (avoiding 10.75% basic-rate dividend tax on £12,570 = £1,351) exceeds the employer NI cost (£1,136)
• Marginal benefit: approximately £215/year in favour of taking £12,570 salary vs an equivalent dividend

At £9,100 (old secondary threshold):

• Employer NI: £615 (15% on £4,100)
• Employee income tax: £0
• Some contractors now prefer this lower salary point to reduce employer NI, accepting marginally lower personal allowance efficiency

At £6,708 (lower earnings limit — preserves NI record):

• Employer NI: £256 (15% on £1,708)
• Employee income tax: £0
• Preserves entitlement to state pension contributions without triggering significant employer NI
• Net employer NI cost below £300/year — a middle ground some accountants recommend

See our optimal director salary for 2026/27 and director salary calculator for interactive modelling of these breakpoints.

The retained profit alternative

With employer NI now more expensive, leaving profit inside the company (rather than extracting it as salary) becomes relatively more attractive. Retained profit:

• Pays no employer NI (it is not a payroll event)
• Pays corporation tax at 25% (main rate, profits over £50K) or 19% (small profits rate, under £50K)
• Can be extracted later as dividends in future tax years (subject to dividend tax rates at that future point)
• Compounds inside the company free of personal income tax until extraction

The trade-off is liquidity: retained profit is inside the company, accessible only through dividend (taxable) or loan (s.455-charged if not repaid). It cannot be spent personally without tax consequence.

HMRC source

Employer National Insurance rates and thresholds are documented at gov.uk — Rates and thresholds for employers. Employment Allowance eligibility is at gov.uk — Employment Allowance.

Summary

The April 2025 employer NI changes — rate from 13.8% to 15%, secondary threshold from £9,100 to £5,000 — increased employer NI on the standard £12,570 director salary from £479 to £1,136 per year. For umbrella contractors, the cost was absorbed into assignment rate calculations, reducing effective take-home. Employment Allowance does not apply to single-director companies. The changes strengthen the case for employer pension contributions (which are NI-exempt) and retained profit (which incurs no payroll costs). Use our director salary calculator to model the optimal salary point for your specific situation.