Background
The rate and threshold for employers national insurance (NI) are to change from 6 April 2025. These changes will impact directors who draw a ‘small’ salary from their business, as well as their employees, so it is important to understand what those changes entail.
Detail
From April 2025 the Secondary Threshold (the point at which an employer starts making NI Contributions) reduces from £9,100 to £5,000, the employers NI rate will increase from 13.8% to 15% on earnings above £5,000 and the employment allowance will also be increased from £5,000 to £10,500. The Lower Earnings Limit, (the point at which an employee starts making NI contributions) remains unchanged at £6,500.
State Pension entitlement
Many directors currently take a salary of £9,100 per annum (£758.33 a month) to ensure no Employers NI is incurred whilst still securing a credit towards state pension. However with the Secondary Threshold changing to £5,000 from April 2025 directors may be considering reducing their salary to £5,000. As this will bring their salary below the Lower Earnings Limit those directors will no longer earn a National Insurance Credit towards their state pension and they may not be entitled to their full state pension if they haven’t made 35 full year’s National insurance contributions. Any directors wishing to maintain their state pension credits will therefore need to take annual salary of at least £6,500.
Employment Allowance
The Employment Allowance has also been increased from £5,000 to £10,500 which sees employers reduce their NI liability by up to £10,500. The increase is designed to help support smaller employers with the overall rise in NI rates. It is important to note that to be eligible for the employment allowance a company must be a registered employer operating as a business or charity and must not be a company which has just one director who is the only employee liable for Secondary Class 1 National Insurance. As sole director companies may not be eligible the employment allowance it may be worth considering appointing another director who earns £12,570 or paying an employee who earns above £5,000 in order qualify for the increased allowance.
National Minimum Wage (NMW)
Care also needs to be taken to review directors’ contracts to determine if NMW rules should apply. If a contract of employment is in place, any salary needs to comply with NMW rates which will be £12.21 from 1 April 2025 and on a 40 hour week this comes to £25,396.80. Typically directors are remunerated as an office holder and not an employee which ensures that the NMW does not apply. An individual who holds the office of director of a company may also be employed by the same company under a contract. In such an instance they would be entitled to the NMW like any other employee for the work done under the contract.
What is the optimum salary amount for 2025/26?
This will depend on the individual directors own circumstances and any other income but broadly will be:
For a director only company the recommended salary would be £12,570 per annum. This is likely to prove the most tax efficient way for individuals looking to utilise their personal allowance in full and gain a qualifying state pension year. While this carries an Employer NI obligation of £1,135.50, the salary and the NI obligation can be offset against company profits therefore reducing the companies corporation tax liability, by more than the NI charge.
For a director only company wishing only to minimise their NI obligations the recommended salary would £6,500 per annum, with the additional Employer NI obligation being £225.
For a company with multiple directors the recommended salary would be £12,570 per annum.
If you would like further information on National Insurance for directors, or on any of the points raised above, please contact our Tax Director, Jenny Marks.
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