Employer National Insurance in 2026/27: What the Higher Rate Costs You and How the Employment Allowance Helps
Employer NIC is now one of the largest costs of hiring in the UK. Here is how to model the true cost of a role, who qualifies for the Employment Allowance, and the legitimate ways to reduce the bill.
For most UK small businesses, employer National Insurance is now the second-largest payroll line after gross pay itself. It is also the cost most often left out of hiring decisions.
How employer NIC works
Employer (secondary Class 1) NIC is charged on each employee's earnings above the secondary threshold, at the secondary rate. Unlike employee NIC, there is no upper limit — the charge continues on every pound of salary, however senior the role.
Two consequences follow:
- The cost of a pay rise is always higher than the pay rise.
- Reducing the form in which reward is delivered — not the amount — is where the savings live.
Model the true cost of a role
Never budget a hire at its salary. A realistic model includes:
| Component | Typical treatment |
|---|---|
| Gross salary | The headline figure |
| Employer NIC | On earnings above the secondary threshold |
| Employer pension | Minimum 3% of qualifying earnings under auto-enrolment |
| Holiday cover | 28 days statutory minimum, including bank holidays |
| Equipment and software | One-off plus per-seat licences |
| Recruitment | Agency fees or your own time |
A £35,000 role rarely costs less than £40,000 fully loaded. If your gross margin per employee does not clear that, the role does not pay for itself yet.
The Employment Allowance
The Employment Allowance lets eligible employers reduce their annual employer NIC bill. Key rules:
- It is claimed through your payroll software as part of your Employment Payment Summary, and it applies until the allowance is used up, not spread evenly across the year.
- It must be claimed each tax year — it does not roll forward automatically in every payroll package. Check your first submission of the year.
- Single-director companies with no other employees do not qualify. If the director is the only person on the payroll earning above the secondary threshold, the claim is not available.
- Connected companies must nominate one company to claim.
- It cannot be used against Class 1A NIC on benefits in kind.
The single-director rule is the one that catches people out. Adding a second employee earning above the secondary threshold can restore eligibility — but only if that employment is genuine and commercially justified.
Legitimate ways to reduce the bill
1. Salary sacrifice into pension. The employee gives up salary in exchange for a larger employer pension contribution. Both employer and employee NIC fall, and the employee's pension pot is unchanged or better. It needs a proper contractual variation, and you must check the reduced salary does not breach National Minimum Wage.
2. Electric company cars. Provided through salary sacrifice, low-emission vehicles remain one of the few genuinely efficient benefits, though Class 1A NIC applies to the benefit value.
3. Trivial benefits. Gifts under £50 that are not cash, not a reward for work and not contractual are exempt. Directors of close companies are capped at £300 per tax year.
4. Pay the director through the right mix. For an owner-managed company, a modest salary plus dividends usually beats a large salary — but the calculation shifts with Corporation Tax and dividend rates, so run the numbers each year rather than repeating last year's plan.
5. Employer pension contributions instead of a bonus. A bonus attracts employer NIC, employee NIC and Income Tax. An employer pension contribution attracts none of them and is deductible for Corporation Tax.
What does not work
- Paying staff as "contractors" when they work like employees. HMRC applies employment status tests to substance, not paperwork, and the liability sits with the engager.
- Routing payments through a family member who does no real work. Payments must be commercially justifiable for the duties performed.
- Creating a second employee purely on paper to unlock the Employment Allowance.
A practical review process
Once a year, before your payroll year-end:
- Confirm the Employment Allowance claim has been submitted for the current tax year.
- Check every salaried employee against the secondary threshold to see where the NIC actually bites.
- Model the current director salary against the pension and dividend alternatives.
- Ask whether any current cash bonus would be better delivered as an employer pension contribution.
- Re-run auto-enrolment assessments for anyone whose pay has changed.
The bottom line
Employer NIC is unavoidable, but its size depends on how reward is structured. Model roles fully loaded, claim what you are entitled to, and check once a year whether the mix of salary, pension and dividend still fits your numbers.