Until 30 September
Key takeaways
The Employer National Insurance contribution (NIC) rate remains elevated at 15%, a significant rise from the previous 13.8%.
The Secondary Threshold at which employers start paying NICs on employee earnings has been brought down to an annual £5,000.
To help offset these rising costs, the Employment Allowance has increased to £10,500, with previous eligibility caps removed.
Accurate financial forecasting is now critical for managing cash flow and maintaining profitability under these tighter margins.
Adopting robust payroll software is essential for handling complex calculations and ensuring strict adherence to HMRC regulations.
Following the April 2025 legislative reforms, UK finance and HR leaders must adapt to the structural payroll tax changes in order to guarantee compliance and effectively plan for rising employment costs.
How have employer National Insurance contributions changed?
The 2024 Autumn Budget introduced a significant structural shift in how businesses contribute to the state social security system. For growing companies in the UK, understanding the mechanics of this National Insurance increase is the first step toward effective financial planning.
What is the new Class 1 employer NIC rate?
The headline change that continues to impact budgets in 2026 is the increase in the Class 1 Secondary (Employer) NIC rate. Employers are, in fact, now required to contribute 15 percent of the earnings of their employees above the relevant threshold, up from 13.8% in 2024/25.
This 1.2 percentage point hike might seem marginal on paper, but when applied to a growing workforce, the cumulative effect on your annual wage bill is substantial.
This increase does not apply to employee contributions (i.e. Class 1 Primary), which remain protected in order to ensure workers’ take-home pay is not directly hit by the reform.
However, for businesses, every new hire and every salary increase now carries a heavier tax burden. Finance teams therefore need to adjust their models to account for this higher rate, so that their companies have sufficient liquidity to meet their monthly PAYE obligations to HMRC.
How does the lowered Secondary Threshold affect liabilities?
Perhaps more impactful than the rate hike itself is the sharp reduction in the Secondary Threshold. Historically, this limit sat much closer to the Primary Threshold for employees. However, since April 2025, employers have been liable for NICs on a much larger portion of an employee’s income.
With the threshold lowered to £5,000 per annum (approximately £96 per week), liabilities are triggered much earlier in the payroll cycle. This change disproportionately affects businesses with a large number of part-time staff or lower-paid workers, as earnings that were previously exempt from employer NICs now fall within the taxable bracket.
Secondary Threshold by pay frequency
| Pay frequency | Previous Secondary Threshold (pre-April 2025) | Current Secondary Threshold (2025/26 & 2026) |
|---|---|---|
| Weekly | £175 | £96 |
| Monthly | £758 | £417 |
| Annual | £9,100 | £5,000 |
For example, a part-time employee earning £8,000 a year would previously have attracted zero employer NICs. But, under the current rules, the employer will pay 15% on the £3,000 difference between the £5,000 threshold and their gross pay. This effectively widens the tax base, having a more significant impact on earnings.
UK statutory employment rights guide
How will the National Insurance increase impact business costs?
The combined effect of a higher rate and a lower threshold is a double whammy for UK employers. It is therefore really important to model the impact of these changes and understand the scale of the financial commitment required for the 2026 tax year.
What are the current National Insurance rates and thresholds?
| Category | Previous rules (pre-April 2025) | Current rules (2025/26 & 2026) |
|---|---|---|
| Employer NIC Rate | 13.8% | 15% |
| Secondary Threshold (annual) | £9,100 | £5,000 |
| Employment Allowance | £5,000 | £10,500 |
| Employment Allowance Cap | £100,000 | Cap removed |
The following graph plot more immediately illustrates the 2025/26 double whammy effect:
Furthermore, based on current government announcements and the November 2025 OBR forecast, the rate and threshold freeze is set to continue through the 2027/28 tax year, up until 2031.
Furthermore, based on current government announcements and the November 2025 OBR forecast, the rate and threshold freeze is set to continue through the 2027/28 tax year, up until 2031.
How much will the cost of employment increase?
In forecasting your headcount costs for 2026, you have to look beyond the gross salary, since the total cost of an employee has risen. Finance managers will therefore need to continually reassess their budgets, in order to ensure that the business does not overextend itself.
Consider the impact across your entire workforce. The portion of earnings subject to the employer charge has risen by £4,100 (the difference between the old £9,100 threshold and the new one set at £5,000). When you apply the 15% rate to this additional band of taxable income, plus the increase on the rest of the salary, the additional liability per employee can range from several hundred to over a thousand pounds annually.
Estimated employer cost impact per employee
| Gross annual salary | Old Employer NIC cost (approx.) | New Employer NIC cost (approx.) | Total cost to business (salary + new NICs) |
|---|---|---|---|
| £20,000 | £1,504 | £2,250 | £22,250 |
| £30,000 | £2,884 | £3,750 | £33,750 |
| £50,000 | £5,644 | £6,750 | £56,750 |
Note: The ‘total cost’ above includes gross salary and Employer NICs only. It excludes mandatory pension contributions (minimum 3%) and other overheads, which increase the figure further.
It is also important to consider how these changes will interact with other statutory costs, as per the Working Time Regulations. In particular, payments for Statutory Sick Pay (SSP), Maternity Leave and Shared Parental Leave rely on accurate average weekly earnings calculations, which must remain precise in the face of the shifting tax landscape. Ensuring your payroll solution can handle all of these factors automatically is critical in order to avoid errors and HMRC penalties.
How can the Employment Allowance help offset rising costs?
There is a small silver lining for many small and medium-sized enterprises (SMEs). To mitigate the impact of the National Insurance increase, the government has significantly extended the scope of the Employment Allowance.
This relief allows eligible employers to reduce their annual National Insurance liability by up to £10,500.
Crucially, the eligibility rule that previously barred companies with a NIC bill of over £100,000 from claiming has been scrapped. This means that larger growing businesses that were previously excluded can now access this relief.
For a micro-business with just a few employees, this increased allowance might completely offset the rise in NICs, effectively shielding them from the tax hike.
However, for a scaling company with 50 or more staff, the relief, while welcome, will likely only cover a fraction of the increased overheads. Managers should verify their eligibility and ensure their claim is submitted via their HMRC RTI submission at the start of the tax year, in order to improve cash flow immediately.
How can businesses adapt their payroll strategy in 2026?
Adapting to these financial realities requires more than just updating a spreadsheet. It demands a strategic approach to managing your people and your payroll processes.
What are the compliance risks for directors and benefits?
The complexity of the UK tax system means that manual calculations are increasingly risky. With different thresholds for various category letters, including those for under 21s, apprentices, veterans, and employees working in designated Investment Zones and Freeports, the margin for error is slim.
Directors have their own specific rules for National Insurance, which is often calculated on an annual or cumulative basis, rather than weekly or monthly. This ensures that their contributions are correct regardless of irregular payment patterns. Failing to apply the correct logic here can lead to significant underpayments or overpayments, both of which may require costly corrections later on.
Furthermore, benefits in kind remain a key area of focus. The Class 1A NIC rate on benefits such as company cars and private medical insurance is also pegged to the employer rate.
This means providing these perks has become more expensive. Reviewing your benefits package to ensure it remains cost-effective is a particularly wise move at this time.
Why is payroll software essential for managing these changes?
In this challenging environment, reliance on outdated legacy systems or manual administrative work is a severe liability. The best way to secure your business against compliance risks is to use modern, integrated HR and payroll software that updates automatically in line with legislative reforms.
A dedicated payroll solution does more than just calculate tax. It provides real-time visibility into your labour costs, allowing you to run scenarios and plan for future hires with confidence. For example, if you plan to expand your sales team in Q3 2026, your system should be able to project the exact employer NIC cost based on the current 15% rate and £5,000 threshold.
Moreover, efficiency is paramount. Modern platforms can streamline the distribution of electronic payslips, reducing the administrative burden, and ensuring employees have transparent and immediate access to their data. When you automate all of these administrative tasks, your HR and finance teams can then focus on higher-value work, such as retention strategies, talent acquisition and strategically improving finance processes and cash flow forecasting.
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