Employer national insurance contributions for small business

Recent changes to National Insurance Contributions (NICs) have increased the cost of employing staff for small businesses. Understanding your responsibilities can help you plan more effectively and potentially reduce your liability through schemes such as the Employment Allowance.

In this article, we’ll explain what the recent changes mean for small businesses, outline the different types of National Insurance contributions, and show you how to use the Employment Allowance to reduce your costs.

What the changes to National Insurance contributions mean for small businesses

While recent changes have reduced NICs for employees and the self-employed, the costs for employers are set to change. However, a simultaneous increase in the Employment Allowance aims to protect the smallest businesses from these changes.

• Increased rate: The secondary Class 1 NICs rate that employers pay will increase from 13.8% to 15%.
• Lower threshold: The Secondary Threshold, the annual earnings point at which employers begin to pay NICs for an employee, will be reduced from £9,100 to £5,000. This means employers will start paying contributions on employees with lower earnings than before.
• Boosted employment allowance: To offset these costs, the maximum Employment Allowance will more than double, increasing from £5,000 to £10,500 per year. This allowance can be used by eligible businesses and charities to reduce their annual secondary Class 1 NICs liability.
• Expanded eligibility for allowance: The rule that prevented employers with a secondary NICs liability of £100,000 or more in the previous tax year from claiming the Employment Allowance will be removed. This change makes the allowance accessible to all eligible businesses, regardless of their prior year's liability.

These changes directly affect your bottom line, as employer NICs apply to every pound you pay employees above certain thresholds.

Even small percentage increases can result in significant additional costs when spread across your entire workforce. This can strain cash flow, particularly during seasonal fluctuations or periods of economic uncertainty, and may influence decisions around hiring, salary increases, or business growth.

The changes are especially challenging for labour-intensive businesses or those employing many part-time staff (where the cumulative cost of higher NICs can be substantial). 

Do small businesses pay National Insurance?

If you employ staff who earn above the secondary threshold, which is now £5,000 per year (approximately £96.15 per week), you must pay employer National Insurance contributions. This requirement applies to employers, but significant relief is available through the Employment Allowance, which provides a reduction of up to £10,500 per year on your secondary Class 1 NICs liability.

The different types of National Insurance Contributions (NICs)

NICs are mandatory payments made by both employers and employees on earnings above certain thresholds. There are different classes of NICs you may have to pay for, depending on your specific circumstances.

There are six classes of NICs – and we cover the ones relevant to small business owners below (i.e. we don’t discuss Class 3 NICs, which are voluntary contributions that people can pay to fill gaps in their National Insurance record). 

Class 1 NICs

Class 1 employer contributions are the most common type for businesses with employees. You pay these contributions in addition to employees’ wages for anyone earning more than £175 per week.

The current employer rate is 13.8% on earnings above this threshold, with no upper limit. Unlike employee contributions, your liability increases continuously with higher salaries.

Class 1A and 1B NICs

Class 1A NICs apply to most benefits-in-kind that you offer employees (like company cars, private medical cover, or gym memberships). The rate is the same as for Class 1 contributions – 13.8% – and is based on the taxable value of the benefits.

Class 1B NICs are linked to PAYE Settlement Agreements (PSAs), where you agree with HMRC to settle tax and National Insurance on minor or irregular benefits on behalf of employees. This simplifies administration but means you pay both the employer and employee portions of NICs.

Class 2 and Class 4 NICs

If you are a sole trader or partner in a partnership, you will pay Class 2 and Class 4 NICs instead of Class 1. Class 2 is a flat weekly rate for profits above £6,725 annually, while Class 4 is based on a percentage of profits between £12,570 and £50,270.

Some small businesses may encounter these classes where directors also work as contractors or where there are mixed employment arrangements.

What is employer's National Insurance?

Employer National Insurance is the contribution you must pay to HMRC for each employee earning over £175 per week. It is charged at 13.8% on the amount above this threshold and is separate from the National Insurance paid by your employees.

How small businesses can offset higher costs

With National Insurance costs rising, there are several strategies you can use to help manage the business impact.

First, review your payroll structure. You may find opportunities to reduce liability through salary sacrifice schemes, optimised benefit packages, or pension contributions. These options can lower NICs while still rewarding staff effectively.

Improved cash flow management becomes increasingly important as employment costs rise. Proper tax planning and budgeting can help you avoid shortfalls, while flexible credit options can provide working capital to bridge payment gaps.

Consider whether invoice financing or short-term credit lines might help balance the timing between customer payments and your National Insurance obligations. This is particularly helpful for businesses with seasonal income patterns or extended client payment terms.

What is the Employment Allowance?

The Employment Allowance is a government initiative aiming to reduce the cost of employment for small businesses. Eligible employers can reduce their annual employer NICs by up to £5,000.

For many small businesses, this allowance can eliminate their entire NIC liability, freeing up funds to invest in growth, equipment, or staff development. The scheme aims to support smaller employers by offsetting the costs of hiring.

Is my business eligible for the Employment Allowance?

Most small businesses qualify, provided your total employer NICs in the previous tax year were £100,000 or less.

However, the allowance does not apply if you employ someone for personal or domestic work, or if the only employee is also a director. Standard commercial businesses with multiple staff will generally be eligible.

How to claim the Employment Allowance

Claiming the Employment Allowance is straightforward and can usually be done through your payroll software when submitting your Full Payment Submission (FPS) to HMRC.

If you submit payroll manually, you can claim through HMRC’s online services or by indicating your claim on the FPS. You do not need to send additional documents initially, but you should keep records of your eligibility in case HMRC requests them later.

Backdated Employment Allowance claims

If you were eligible in previous years but forgot to claim, you may be able to apply retrospectively. HMRC permits backdated claims for up to four tax years, provided you can prove eligibility for those periods.

To submit a backdated claim, contact HMRC directly or file an amended FPS for the relevant years. You will need to calculate the allowance due and provide supporting evidence. HMRC will confirm the amounts.

When does National Insurance need to be paid?

National Insurance contributions follow the same payment schedule as PAYE income tax. For most small businesses, this means monthly payments are due by the 22nd of the following month (or by the 19th if paying by post).

Late or missed payments will incur automatic penalties and interest from HMRC, starting from the first day they are overdue. 

Your payment history with HMRC, including NICs, also affects your business’s credit standing and may influence future interactions with the tax authority. Maintaining a good track record demonstrates strong financial management and can be advantageous when negotiating payment terms or resolving tax matters.

Managing National Insurance costs with flexible finance

Given the rising burden of employer NICs and the need to maintain a steady cash flow, small businesses can use flexible financing to manage these obligations.

iwoca’s Flexi-Loan is a simple way to borrow from £1,000 to £1,000,000. You only pay interest on the amount you use, making it ideal for managing variable expenses or short term cash flow gaps, such as National Insurance contributions.

Once approved, funds are available instantly, allowing you to cover HMRC payments on time while waiting for client invoices to be settled or during seasonal slowdowns. 

With no early repayment penalties and flexible terms, a Flexi-Loan gives you the financial breathing space needed to stay compliant and continue growing your business.

You can apply for a Flexi-Loan online. It takes minutes, and you could be approved within 24 hours. Apply now.