Changes to Employers NI in respect of Directors

28 March 2025

The Chancellor has introduced new tax rules that will significantly impact company directors. While these changes may not be immediately obvious, they could cost directors and small business owners thousands of pounds per year. Here’s a simple breakdown of what’s happening and what you need to do about it.

The Key Change: Employers Start Paying NI Sooner

Under the old system, directors could structure their salaries in a way that minimized National Insurance (NI) contributions. By setting their salary at a specific threshold, they could benefit from NI credits (and this receive a qualifying year in respect of state pension and benefits) without actually paying NI. However, this strategy is now being restricted.

Here’s the crux of the change:

• The Lower Earnings Limit (LEL) is being removed.
• Employers will have to start paying National Insurance immediately on directors’ salaries.
• This works out to an additional £51 per month for many directors.
• If a company has a payroll of £100,000, it will pay an extra £3,000 per year in Employers’ NI.
• For businesses with a payroll of £1 million, the additional cost rises to £30,000 per year.

What Does This Mean for Directors?

For directors who have been carefully balancing their salary to stay tax-efficient, this is a game-changer. It means:

• You can no longer avoid Employers’ NI by keeping your salary at a lower level.
• The employment allowance (which allows businesses to reduce their Employers' NI bill by up to £5,000 per year) does not apply to companies with just one director. If your company only has one director on the payroll, you won’t benefit from this allowance.

What Should Directors Do?

Despite these changes, it remains crucial to take a salary that complies with HMRC rules. If you don’t pay enough National Insurance, you could lose out on vital state benefits, including your state pension.

To qualify for the state pension, you need to make at least 10 years of NI contributions, and for the full state pension, you need 35 years. If you keep your salary too low, you may not hit the required contribution level, risking your future pension entitlement.

Final Thoughts

Whilst these changes might seem small at first, the costs will add up over time. Directors need to rethink how they pay themselves and ensure they don’t inadvertently lose out on state benefits. If you're unsure about the best approach, speak to an accountant to optimize your salary structure while staying compliant with HMRC.

Staying informed and adjusting your pay strategy now can help you avoid unexpected costs and ensure you continue to qualify for essential benefits in the future.