Payroll Optimisation Following the Lowered NIC Secondary Threshold in 2025-26
- Adil Akhtar
- 3 days ago
- 13 min read
The Audio Summary of the Key Points of the Article:
Understanding the NIC Secondary Threshold Changes and Their Impact
What Are the New NIC Rules for 2025-26?
So, let’s get straight to it: the UK government has shaken things up for employers with changes to National Insurance Contributions (NICs) starting 6 April 2025. The big headline is the secondary threshold—the point at which employers start paying NICs on employee earnings—dropping from £9,100 to £5,000 per year (£96 per week). On top of that, the employer NIC rate is climbing from 13.8% to 15%. Meanwhile, the Employment Allowance, which lets eligible businesses offset their NIC bill, is doubling from £5,000 to £10,500, and the £100,000 NIC liability cap for eligibility is gone. These changes, announced in the Autumn Budget 2024, aim to boost NHS funding and contributory benefits but hit employers’ wallets hard. You can check the official rates at GOV.UK’s employer rates page.
Now, why should you care? These tweaks mean businesses will pay NICs on a larger chunk of earnings, and the higher rate amplifies the cost. For example, an employee earning £20,000 in 2025-26 will cost an employer £2,250 in NICs, up 50% from £1,504 in 2024-25. But don’t panic—there are ways to soften the blow, which we’ll dive into later.
Why These Changes Matter for Your Business
Now, if you’re running a business, you’re probably wondering how deep this will cut. The lowered threshold and higher rate are a double whammy, especially for small and medium-sized enterprises (SMEs). According to the Office for Budget Responsibility (OBR), these changes will impact around 1.2 million employers, with 940,000 seeing higher NIC costs and 250,000 potentially benefiting from the expanded Employment Allowance. The OBR also predicts a 0.2% rise in consumer prices as businesses pass on costs, which could squeeze wages or profits.
Let’s break it down with some numbers. The table below compares employer NIC liabilities for different salaries in 2024-25 vs. 2025-26, assuming no Employment Allowance:
Annual Salary (£) | 2024-25 NICs (13.8%, £9,100 threshold) | 2025-26 NICs (15%, £5,000 threshold) | Increase (£) | % Increase |
20,000 | 1,504 | 2,250 | 746 | 49.6% |
36,036 (UK average) | 3,715 | 4,655 | 940 | 25.3% |
60,000 | 7,024 | 8,250 | 1,226 | 17.5% |
100,000 | 12,544 | 14,250 | 1,706 | 13.6% |
This table shows the stark reality: lower earners trigger bigger percentage increases because the threshold drop exposes more of their salary to NICs. High-wage sectors feel a smaller relative hit, but the absolute cost is still significant.
Who Feels the Pinch Most?
Be careful! If you’re in a low-wage sector like hospitality, retail, or care, these changes could sting. For instance, a part-time worker earning £12,000 now costs you £1,050 in NICs (up from £386), a 172% jump. Small businesses with tight margins might struggle to absorb this, especially with the National Minimum Wage also rising (check GOV.UK’s minimum wage rates).
Let’s look at a real-world example. Meet Priya, who runs a small café in Bristol with five part-time staff earning £15,000 each annually. In 2024-25, her NIC bill was £2,070 (£414 per employee). In 2025-26, it rockets to £5,250 (£1,050 per employee). Even with the £10,500 Employment Allowance, Priya’s net NIC cost is now zero (down from £414), but without it, she’d be scrambling to cover the extra £3,180. This shows how vital the allowance is for small businesses, but sole director companies (ineligible for the allowance) face a tougher road.
Sole directors, like Ewan, who runs a one-man consultancy in Glasgow, are particularly exposed. Ewan pays himself £9,100 annually to avoid NICs while securing pension credits. In 2025-26, that salary triggers £615 in employer NICs, wiping out some tax efficiency. We’ll explore director strategies in the next Part.
HMRC’s Role and Compliance
Now, it shouldn’t surprise you that HMRC expects your payroll to reflect these changes seamlessly. Most payroll software, like Payroll Manager or Moneysoft, will auto-update to the new rates and thresholds by April 2025. But if you’re doing payroll manually, you’ll need to double-check calculations to avoid HMRC penalties. From 6 April 2025, you’ll report NICs via Real Time Information (RTI) submissions, even for employees earning just above £5,000. HMRC’s guidance at GOV.UK’s payroll page stresses accurate reporting to avoid fines. For businesses in Freeports or Investment Zones, you’ll also need to provide employee postcodes on Full Payment Submissions (FPS) to claim NIC relief.
So, what’s the takeaway? The lowered threshold and higher rate increase costs, but the expanded Employment Allowance offers relief for eligible SMEs. Low-wage sectors and sole directors need to plan carefully, and compliance is non-negotiable. Next, we’ll dive into how to optimise your payroll to keep costs down.
Practical Strategies for Payroll Optimisation
How Can You Leverage Employment Allowance?
Now, let’s talk about a lifeline for many businesses: the Employment Allowance. From 6 April 2025, this allowance jumps from £5,000 to £10,500, and the old £100,000 NIC liability cap is history. This means eligible businesses can offset up to £10,500 of their employer NICs bill, which is a game-changer for small and medium-sized enterprises (SMEs). According to HMRC, around 1.1 million businesses claimed the allowance in 2024-25, and the expanded version could save employers an average of £2,000 more per year. Check eligibility details at GOV.UK’s Employment Allowance page.
So, who qualifies? You’re eligible if you’re a business, charity, or community amateur sports club with a PAYE-registered payroll, and you’re not a sole director company with no other employees. To claim it, simply tick the Employment Allowance box in your payroll software during your first Full Payment Submission (FPS) of the 2025-26 tax year. The table below shows how the allowance impacts NIC costs for different business sizes:
Number of Employees | Average Salary (£) | 2025-26 NICs Before Allowance (£) | NICs After £10,500 Allowance (£) | Savings (£) |
5 (small business) | 15,000 | 5,250 | 0 | 5,250 |
20 (medium business) | 25,000 | 30,000 | 19,500 | 10,500 |
50 (larger SME) | 36,036 (UK average) | 232,750 | 222,250 | 10,500 |
For a small business like Priya’s café from Part 1, the allowance wipes out her entire £5,250 NIC bill. But larger firms, while still benefiting, may need extra strategies to manage costs.
Is Salary Sacrifice a Game-Changer?
Now, consider this: what if you could legally reduce your NIC bill by tweaking how you pay your staff? Enter salary sacrifice, where employees give up part of their cash salary for non-cash benefits like pension contributions or electric vehicles (EVs). Since NICs only apply to cash earnings, both employer and employee NICs drop. For example, if an employee sacrifices £5,000 of their £30,000 salary for pension contributions, the employer saves £750 (15% of £5,000) in NICs, and the employee saves £600 (12% NIC rate above £12,570).
Let’s look at a hypothetical scenario. Ayesha runs a 20-employee tech firm in Manchester, with each worker earning £40,000. She introduces a pension salary sacrifice scheme, where each employee sacrifices £3,000 annually. This saves Ayesha £9,000 in employer NICs (£450 per employee) and boosts employees’ pension pots. EVs are another hot option, especially with company car tax benefits for zero-emission vehicles. HMRC’s guidance at GOV.UK’s salary sacrifice page outlines how to set this up compliantly.
But here’s the catch: salary sacrifice reduces take-home pay, so you’ll need employee buy-in. Communicate the long-term benefits, like bigger pensions or tax-free EV use, to win them over.
Can Workforce Planning Save Money?
So, the question is, can you rethink your workforce to cut NIC costs? Absolutely. The lowered £5,000 threshold means even part-time workers now trigger NICs, but you can use exemptions and workforce tweaks to your advantage. For example, employees under 21 and apprentices under 25 are exempt from employer NICs up to the Upper Earnings Limit (£50,270 in 2025-26). Veterans also get a zero-rate NIC band for their first year of civilian employment. Check these exemptions at GOV.UK’s NIC rates.
Take Zara, who owns a pub in Newcastle with 15 staff. By hiring two under-21 baristas at £18,000 each, she avoids £2,100 in NICs annually (15% of £14,000 above £5,000 for two employees). She also shifts some staff to flexible hours, keeping a few below the £5,000 threshold to eliminate NICs entirely. This needs careful planning to comply with National Minimum Wage rules, but it’s a viable strategy for low-margin sectors like hospitality.
What About Director Salaries?
Be careful if you’re a sole director! Unlike other businesses, sole director companies can’t claim Employment Allowance, making the lowered threshold a headache. Many directors, like Ewan from Part 1, pay themselves a tax-efficient salary of £9,100 to avoid NICs while securing state pension credits. In 2025-26, this salary triggers £615 in employer NICs, reducing the tax advantage.
So, what’s the optimal director salary now? One strategy is to drop your salary to £5,000, avoiding employer NICs entirely, but this risks losing pension credits (you need earnings of at least £6,396 for a qualifying year). Alternatively, keep the salary at £12,570 (the personal allowance) and accept £1,135 in NICs to secure tax-free income and pension credits. The best choice depends on your profits and pension goals. For example, if Ewan’s consultancy earns £50,000 in profit, paying £12,570 saves him £1,135 in income tax compared to £9,100, offsetting the NIC cost.
Step-by-Step Guide: Calculating Your NIC Costs
None of us loves crunching numbers, but knowing your NIC liability is crucial. Here’s a step-by-step guide to estimate your 2025-26 costs and savings:
List Employee Salaries: Gather annual gross salaries for all staff, including directors.
Apply the Threshold: Subtract £5,000 from each salary to find the taxable amount.
Calculate NICs: Multiply the taxable amount by 15% for each employee.
Sum Total NICs: Add up NICs across all employees.
Apply Employment Allowance: If eligible, subtract up to £10,500 from the total.
Explore Salary Sacrifice: Estimate savings from pension or EV schemes (e.g., 15% of sacrificed salary).
Check Exemptions: Deduct NICs for under-21s, apprentices, or veterans.
For example, a business with 10 employees at £20,000 each owes £22,500 in NICs (10 x £15,000 x 15%). With Employment Allowance, this drops to £12,000. Adding £2,000 per employee in pension sacrifice saves another £3,000 (10 x £2,000 x 15%), bringing the bill to £9,000.
This guide helps you see the big picture and spot savings. Next, we’ll wrap up with key takeaways and advanced tips to keep your payroll lean and compliant.
Summary of Key Takeaways and Advanced Tips
What Are the Most Critical Points to Remember?
Now, let’s boil down everything we’ve covered into the essentials. The changes to National Insurance Contributions (NICs) for 2025-26 are a big deal for UK businesses, but with smart planning, you can keep costs in check. Here are the top 10 takeaways, each distilled into a single sentence for clarity:
The secondary threshold for employer NICs drops from £9,100 to £5,000 on 6 April 2025, increasing the taxable portion of employee earnings.
The employer NIC rate rises from 13.8% to 15%, amplifying costs, especially for low-wage workers.
The Employment Allowance doubles to £10,500, with no £100,000 liability cap, offering significant relief for eligible SMEs.
Sole director companies can’t claim Employment Allowance, making payroll optimisation critical to manage the new £615 NIC cost on a £9,100 salary.
Salary sacrifice schemes, like pensions or electric vehicles, can save 15% employer NICs on sacrificed amounts, with employee buy-in.
Exemptions for under-21s, apprentices under 25, and veterans reduce NICs, ideal for sectors like hospitality or retail.
Directors may optimise salaries at £5,000 to avoid NICs or £12,570 to balance tax-free income and pension credits.
Accurate payroll reporting via Real Time Information (RTI) is essential to comply with HMRC and avoid penalties.
Low-wage sectors face steep cost increases (e.g., 172% for a £12,000 earner), requiring creative workforce planning.
Payroll software must be updated by April 2025 to reflect new rates and thresholds, per HMRC guidance at GOV.UK’s payroll page.
These points capture the heart of the changes and strategies to navigate them. Keep them in mind as you plan your payroll for 2025-26.
What Are Some Advanced Optimisation Tips?
So, you’ve got the basics down, but what about those lesser-known tricks to save even more? Let’s explore some advanced strategies that go beyond the usual advice. For businesses in Freeports or Investment Zones, there’s a hidden gem: upper secondary threshold relief. Employees working in these areas (at least 60% of their time) qualify for a higher NIC threshold of £25,000 until 2031, slashing employer NICs. For example, a £20,000 earner in a Freeport costs £2,250 in NICs normally but only £750 with the relief—a £1,500 saving per employee. You’ll need to report employee postcodes on your Full Payment Submission (FPS) to claim this, as outlined at GOV.UK’s Freeport guidance.
Another smart move is voluntary Class 3 NICs for low-earning directors or employees. If your salary dips below £6,396 (the lower earnings limit for pension credits), you can pay voluntary NICs (£3.45 per week in 2025-26) to secure a qualifying year for your state pension. For instance, Ewan, our Glasgow consultant, could drop his salary to £5,000 to avoid employer NICs and pay £179.40 annually in Class 3 NICs to maintain pension eligibility. This saves £435 compared to the £615 NIC cost on a £9,100 salary.
Don’t overlook proactive payroll budgeting. With the secondary threshold frozen at £5,000 until April 2028, per the Autumn Budget 2024, you can forecast NIC costs with certainty. Create a rolling three-year budget, factoring in wage inflation (e.g., 2% annually per OBR estimates) and potential CPI adjustments post-2028. This helps you avoid surprises and plan investments or price adjustments.
How Should You Plan for 2028 and Beyond?
Now, looking ahead, the frozen £5,000 threshold until 2028 means NIC costs will creep up as wages rise. The Office for Budget Responsibility predicts a 0.2% wage growth impact from these changes, so businesses in competitive sectors like tech or manufacturing should factor this into hiring plans. For example, Ayesha’s Manchester tech firm could lock in salary sacrifice agreements now to offset future NIC hikes, ensuring long-term savings.
Another tip is to stress-test your payroll strategy. Use the worksheet from Part 2 to model scenarios: What if you hire more under-21s? What if half your staff opt for salary sacrifice? This helps you identify the best mix of exemptions, allowances, and schemes. For instance, Zara’s Newcastle pub could save £5,000 annually by hiring three under-21s and offering flexible hours to keep two staff below £5,000.
Finally, stay on HMRC’s good side. Regularly check GOV.UK’s employer rates page for updates, especially on CPI adjustments post-2028. Set calendar reminders for April 2025 to update payroll software and review FPS submissions. By staying proactive, you’ll keep your business lean and compliant, ready for whatever tax changes come next.
FAQs
Q: What is the new NIC secondary threshold for employers in 2025-26?
A1: The secondary threshold, where employers start paying NICs on employee earnings, is lowered to £5,000 per year from £9,100.
Q2: How does the increased employer NIC rate affect businesses?
A2: The employer NIC rate rises to 15% from 13.8%, increasing costs, especially for businesses with employees earning above the £5,000 threshold.
Q3: Who is eligible for the Employment Allowance in 2025-26?
A3: Businesses, charities, and community amateur sports clubs with PAYE-registered payrolls qualify, except sole director companies with no other employees.
Q4: How much can businesses save with the Employment Allowance?
A4: Eligible businesses can offset up to £10,500 of their employer NICs bill, doubling the previous £5,000 allowance.
Q5: Can sole directors claim any NIC relief?
A5: Sole directors are ineligible for Employment Allowance but can explore salary sacrifice or adjust salaries to minimise NICs.
Q6: What is salary sacrifice, and how does it reduce NIC costs?
A6: Salary sacrifice involves employees giving up cash salary for benefits like pensions, reducing both employer and employee NICs on the sacrificed amount.
Q7: Are there NIC exemptions for specific employee groups?
A7: Employees under 21, apprentices under 25, and veterans in their first year of civilian employment are exempt from employer NICs up to £50,270.
Q8: How can businesses in Freeports benefit from NIC relief?
A8: Employees in Freeports or Investment Zones qualify for a higher £25,000 NIC threshold, reducing employer NICs if they work there at least 60% of the time.
Q9: What happens if payroll software isn’t updated for the new NIC rules?
A9: Outdated software can lead to incorrect NIC calculations, risking HMRC penalties for non-compliance.
Q10: Can businesses pass NIC cost increases to employees?
A10: Businesses may reduce wage growth or adjust pricing to offset NIC costs, but directly passing costs to employees is complex and requires agreement.
Q11: How does the lowered threshold affect part-time workers?
A11: Part-time workers earning above £5,000 now trigger employer NICs, significantly increasing costs for low-wage roles.
Q12: What is the optimal salary for a sole director to minimise NICs?
A12: A £5,000 salary avoids employer NICs, but £12,570 balances tax-free income and state pension credits, depending on profit levels.
Q13: Can voluntary NIC payments help with pension credits?
A13: Paying voluntary Class 3 NICs (£3.45 per week) ensures a qualifying pension year for those earning below £6,396.
Q14: How do businesses report NICs to HMRC in 2025-26?
A14: Employers must report NICs via Real Time Information (RTI) submissions, ensuring accurate calculations and employee postcode data for Freeport relief.
Q15: What sectors are most affected by the NIC threshold change?
A15: Low-wage sectors like hospitality, retail, and care face the largest cost increases due to higher NIC liabilities on modest salaries.
Q16: Can businesses use flexible hours to reduce NIC costs?
A16: Keeping some employees’ earnings below £5,000 through reduced hours can eliminate NICs, if compliant with minimum wage laws.
Q17: How does the frozen NIC threshold until 2028 impact planning?
A17: The £5,000 threshold freeze means rising wages will increase NIC costs, requiring long-term budgeting for payroll expenses.
Q18: What are the risks of non-compliance with NIC reporting?
A18: Incorrect reporting can lead to HMRC fines, interest on underpaid NICs, and audits, impacting business finances.
Q19: Can electric vehicle salary sacrifice schemes save NICs?
A19: Yes, sacrificing salary for electric vehicles reduces NICs and offers tax benefits due to low company car tax rates.
Q20: How can businesses prepare for CPI adjustments post-2028?
A20: Businesses should create rolling budgets factoring in wage inflation and monitor HMRC updates for potential threshold changes.
About The Author:
Adil Akhtar, ACMA, CGMA, CEO and Chief Accountant of Pro Tax Accountant, is an esteemed tax blog writer with over 10 years of expertise in navigating complex tax matters. For more than three years, his insightful blogs have empowered UK taxpayers with clear, actionable advice. Leading Advantax Accountants as well, Adil blends technical prowess with a passion for demystifying finance, cementing his reputation as a trusted authority in tax education.
Email: adilacma@icloud.com
Disclaimer:
Â
The information provided in our articles is for general informational purposes only and is not intended as professional advice. While we strive to keep the information up-to-date and correct, Pro Tax Accountant makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the website or the information, products, services, or related graphics contained in the articles for any purpose. Any reliance you place on such information is therefore strictly at your own risk. Some of the data in the above graphs may to give 100% accurate data.
Â
We encourage all readers to consult with a qualified professional before making any decisions based on the information provided. The tax and accounting rules in the UK are subject to change and can vary depending on individual circumstances. Therefore, Pro Tax Accountant cannot be held liable for any errors, omissions, or inaccuracies published. The firm is not responsible for any losses, injuries, or damages arising from the display or use of this information.
.png)