The Autumn Budget 2024 introduced significant changes to National Insurance Contributions (NICs) that will directly impact company directors, particularly those who take a minimal salary for tax efficiency.
From 6 April 2024, the main rate of Class 1 employee NICs will reduce to 8%, while the employer rate remains at 13.8%.
However, the real changes take effect from 6 April 2025:
- The employer NIC rate will increase from 13.8% to 15%.
- The Secondary Threshold (ST)—the level above which employers must pay NICs—will drop from £9,100 to £5,000.
- The Employment Allowance (a relief for smaller employers) will increase from £5,000 to £10,500 and will be available to all eligible employers.
While the increase in Employment Allowance may help some businesses, sole director companies will not qualify, meaning many directors will now face employer NIC liabilities for the first time.
Impact on Directors’ remuneration strategies
Directors are classified as employees and must pay National Insurance on salary and bonuses exceeding £12,570 per year. Employer NICs must also be paid on directors’ salaries, regardless of company size.
Many directors traditionally take a small salary of £9,100—which is enough to maintain State Pension eligibility while avoiding employee and employer NIC liabilities. The remaining income is taken as dividends, which are taxed at a lower rate.
However, from April 2025, the reduction of the employer NIC threshold to £5,000 means that directors earning above this will now have to pay additional NICs.
For example:
- A director earning £9,100 currently pays no NICs.
- From April 2025, the employer NIC due on this salary will be £615 per year.
- If the salary is increased to £12,570 (matching the personal allowance), the employer NIC liability rises to £1,136 per year.
Sole directors cannot claim the Employment Allowance, meaning these NIC liabilities will be unavoidable unless they change their remuneration strategy.
How Directors can remain tax-efficient in 2025/26
Given these changes, directors of small, limited companies need to reassess their salary structure to balance tax efficiency and pension eligibility. Here are the main options:
1) Keep a Salary at £12,570
- Ensures a qualifying year for the State Pension.
- Still benefits from £12,570 of tax-free income.
- Results in marginally higher NICs—employer NICs increase to £1,136 per year.
- May still be more tax-efficient than taking a lower salary.
2) Reduce Salary to Below £5,000
- Avoids employer NICs altogether.
- Results in a loss of a qualifying year for the State Pension.
- Dividends become the primary method of income, subject to dividend tax rates.
3) Pay a Salary Between £5,000 and £12,570
- This option is not beneficial as it incurs employer NICs without securing a pension year.
Most directors will likely choose between Option 1 (keeping a salary at £12,570) or Option 2 (reducing salary below £5,000 and relying solely on dividends).
With these changes coming into effect from April 2025, now is the time for directors to start considering their salary and dividend structure to maintain tax efficiency while ensuring they qualify for the State Pension. If you would like to discuss this further, you can contact us by calling 01623 490 120 or email