Small business upside to employment allowance - February 10th 2025

Changes to costs for businesses, in particular increases to national insurance contributions (NICs) for employers, have been widely criticised following the Autumn Budget. However the employment allowance is more than doubling in April so some smaller businesses will actually be better off in 2025/26.

The employment allowance will increase from £5,000 to £10,500 from 6 April 2025. The following examples demonstrate the advantages for business owners.

Example 1 – Owner director

Elena is the sole director and owner of a limited company providing marketing services. She takes £60,000 in director’s remuneration each year. The company’s only other employee is Elena’s son. He is at university and maintains the company’s website for a monthly salary of £1,000.

• For 2024/25, the company’s total employer NICs come to £7,424. After deducting the employment allowance, £2,424 will be paid to HMRC.
• Although the total employer NICs cost for 2025/26 will go up to £9,300, the increased employment allowance means no payment will be due.

The employment allowance is not available to companies where a director is the sole employee. This is because the allowance is targeted at businesses that support employment, rather than one-person companies.

The employment of Elena’s son is therefore crucial. If he were not employed, the company would have an employer NICs cost of £7,024 for 2024/25, rising to £8,250 next year.

The increased level of employment allowance means it could be quite beneficial for a one-person company to employ a family member. For the allowance to be available, their gross annual salary must be at least £5,000.

Example 2 – Self-employed

Enzo is self-employed, running a retail store. He has four full-time employees working 35 hours per week at £12.30 per hour.

• The amount of employer NICs payable for 2024/25 after deducting the employment allowance is £2,334.
• Although the total employer NICs cost for 2025/26 will go up by just over £3,000, Enzo will not have to pay anything to HMRC.

This is, of course, a very simplified example, with rates of pay static across the two tax years. If Enzo’s staff were instead paid the National Living Wage (NLW), he would have benefited from a similar saving in employer NICs. However, the increase to the rate of NLW from £11.44 to £12.21 per hour would mean an overall increased salary cost for 2025/26 of just over £4,100.

£100,000 restriction

For 2024/25, the employment allowance is not available where employer NICs were £100,000 or more for 2023/24, meaning larger employers do not qualify. This restriction is removed for 2025/26.