What is the Secondary Threshold and how does it impact UK employers?

The Secondary Threshold is the earnings point at which an employer begins to pay Class 1 National Insurance contributions on an employee’s salary.

What is the current Secondary Threshold?

The Secondary Threshold (ST) is currently set at £5,000 per annum for the 2025/26 tax year. This figure represents the gross earnings limit after which a business becomes liable for Employers National Insurance.

Prior to April 2025, this threshold was aligned much closer to the Primary Threshold, but the reduction to £5,000 means employers now start paying contributions on a larger portion of their employees’ salaries.

For a standard monthly payroll, this now equates to earnings above £417 per month. It is vital to ensure your payroll calculations accurately reflect this lower starting point, in order to avoid HMRC underpayment penalties.

The government has now confirmed that this £5,000 limit is locked in until 2031, providing some certainty for long-term financial planning. However, this shift effectively increases the number of employees for whom you will have to make payments, requiring careful monitoring of cash flow to maintain healthy business profits.

Summary of 2025/26 National Insurance thresholds and limits

What is the rate of employer National Insurance contributions?

The standard rate for Employer Class 1 National Insurance is 15% on all earnings above the Secondary Threshold. This rate applies to the majority of employees aged 21 to state pension age who do not qualify for specific reliefs.

The increase to 15% in April 2025 marked a jump in the cost of employment for UK businesses. When you combine the lower starting threshold of £5,000 with this higher percentage rate, the total liability for maintaining a workforce has risen noticeably.

Finance leaders must account for this extra cost when budgeting for new hires, or conducting salary reviews. Calculating the real cost of your employees can help you benchmark wages and total costs against industry averages, in order to remain competitive and ensure sustainable growth.

Practical example: calculating the impact

To understand the changes, consider a typical scenario. If an employee is paid £30,000 per year, the calculation of the Employers NIC liability would be as follows:

1. Gross pay: £30,000

2. Less the Secondary Threshold: £5,000

3. Equals the Liable Earnings: £25,000

4. To which we apply the Employer NIC rate (15%): £3,750

Under the previous rates and thresholds, the liability would have been significantly lower. This calculation repeats every month, meaning the total financial cost to the business adds up significantly over the year.

Unlike income tax, which is calculated cumulatively on year-to-date earnings, NIC is typically calculated on a stand-alone basis each week or month. This distinction demonstrates why businesses need to accurately forecast their payments to HMRC.

Are there exceptions for Freeports and Investment Zones?

Businesses operating within designated Freeports or Investment Zones benefit from a much higher secondary threshold of £25,000 per year.

This relief is designed to encourage investment and job creation in these specific geographic areas. If you employ eligible staff who spend at least 60% of their working time in a Freeport or Investment Zone tax site, you will not need to pay the 15% Employer NICs until their earnings exceed £25,000. This is known as the Freeport Upper Secondary Threshold (FUST) and Investment Zone Upper Secondary Threshold (IZUST).

The relief can apply for up to 36 months per employee. Checking the eligibility of your business premises and your staff’s working patterns is crucial to claiming this substantial saving.

How does the Employment Allowance help?

The Employment Allowance allows eligible employers to reduce their annual National Insurance liability by up to £10,500.

This allowance effectively eliminates the first £10,500 of Class 1 Employer NICs from your bill each year. Previously capped for businesses with lower NIC liabilities, the removal of the £100,000 eligibility cap means more growing businesses can now use this relief to offset Class 1 costs.

However, while the cap has been removed, other restrictions remain: public bodies and businesses with only one employee (who is also a director) are still generally excluded. Understanding your eligibility is a key part of modern payroll compliance.

Once you have established you are eligible, you must actively claim the Employment Allowance through your PAYE process, as HMRC will not apply it automatically.

A 2025/26 compliance checklist

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What specific reliefs apply to different employee groups?

While the standard threshold is £5,000, specific categories benefit from higher thresholds to encourage employment in those categories.

Employees under 21 and apprentices

For employees under the age of 21, the employer pays 0% on earnings up to the Upper Secondary Threshold (UST), which is currently aligned with the Upper Earnings Limit of £50,270.

Similarly, if you employ an apprentice under 25, you are not liable for Employer NICs on their pay up to this same limit.

This zero-rate policy is intended to tackle youth unemployment, and encourage the training of young professionals. However, once their income surpasses £50,270, the standard 15% rate applies to the excess.

Using the correct National Insurance Classes and category letters in your software is essential to applying these reliefs correctly.

Veterans relief

Employers can also claim relief for employing qualifying veterans during their first year of civilian employment.

For these employees, the Secondary Threshold is effectively raised to the Veterans Upper Secondary Threshold (VUST), which is also set at £50,270 for the 2025/26 tax year. This allows businesses to employ former service personnel without incurring employer NICs on a significant portion of their salary for the first 12 months, regardless of the hours they work.

How do directors’ earnings affect the calculation?

Directors most often have their National Insurance calculated on an annual, cumulative basis, rather than per pay period.

So, while regular employees have their liability calculated each and every time they are paid (weekly or monthly), directors have an annual earnings period.

This ensures that the Secondary Threshold of £5,000 is applied correctly across the entire year, regardless of fluctuating pay or irregular bonuses. This method prevents directors from taking advantage of the weekly or monthly thresholds to avoid contributions.

However, an alternative method, often called the Table Method, allows directors to be treated like regular staff throughout the year. This applies the monthly threshold (approx. £417) each month, spreading the cost evenly rather than deferring it.

While the Table Method aids personal budgeting, it requires a mandatory recalculation at year-end in order to ensure the correct annual liability is met, and some businesses may still prefer the standard cumulative method to aid cash flow.

Understanding the nuances of tax and National Insurance for directors is critical for compliance.

What should businesses plan for in 2026 and beyond?

Businesses should expect the Secondary Threshold to remain frozen at £5,000 until at least April 2031. However, while the threshold remains static, the Lower Earnings Limit and other statutory rates, such as the National Minimum Wage, are likely to increase.

For the 2026/27 tax year, the Lower Earnings Limit is projected to rise to roughly £6,708. A frozen Secondary Threshold in a context of rising wages creates a phenomenon known as ‘fiscal drag’, where more of an employee’s salary drifts into the liable zone for NICs.

This effectively increases the tax burden on the employer year-on-year without the headline rate technically changing. Therefore, forward-thinking managers need to forecast these creeping costs when planning long-term budgets, as each new tax year brings new financial dynamics.

Why is accurate payroll software essential?

Using automated software ensures that complex threshold interactions and rate changes are applied instantly and automatically, without the need for manual intervention.

The complexity of managing different category letters for veterans, Freeport workers, apprentices, and standard employees demands a robust automated payroll solution.

Manual calculations or outdated systems often miss subtle changes, such as the specific cut-off dates for age-related reliefs, or the precise application of P32 form totals.

A modern cloud-based platform updates statutory figures automatically, ensuring that your business remains compliant with HMRC rules, and claiming any available reliefs, such as the Employment Allowance.

Furthermore, relying on real-time information and HR integrations ensures that HMRC receives the correct data regarding the number of employees falling into each class.

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