Employers NI changes in 2025

How the 2025 changes hit sole directors hardest

Over the past few months, we’ve had dozens of conversations with sole limited company directors across Kent who are discovering that the 2025 employer’s National Insurance changes are particularly hard on them.

Let’s break down exactly what’s happening and, more importantly, what you can do about it.

What the 2025 National Insurance changes actually mean for sole directors

The 2025 National Insurance changes are a double whammy for small business owners. First, the employer National Insurance rate has increased from 13.8% to 15% – that’s an extra 1.2 percentage points on every pound of salary you pay yourself. Second, and probably more painfully, the threshold at which you start paying employer National Insurance has dropped from £9,100 to £5,000.

Let’s look at what this means in real money. If you’re taking the typical director’s salary of £12,570 (the personal allowance threshold), here’s how your National Insurance bill has changed:

Previous system (2024/25):

• Employer NI on £12,570 – £9,100 = £3,470
• 13.8% × £3,470 = £479

New system (2025/26):

• Employer NI on £12,570 – £5,000 = £7,570
• 15% × £7,570 = £1,136

That’s an eye-watering increase of £657 per year (or 137%!) – and that’s just for taking a relatively modest salary. The cruelty is that sole directors can’t escape this burden the way larger businesses can. You can’t reduce your headcount because you’re the only employee, and you can’t spread the administrative burden across a larger workforce.

A construction company director from Sevenoaks recently told me he felt “punished for being successful but small.” It’s hard to disagree when you see the numbers laid out like this.

Strategic responses to minimise the damage

While these changes are unwelcome, they’re not insurmountable. The key is to revisit your salary and dividend strategy to find the new optimal balance.

Reconsidering your salary level

The traditional advice of taking a salary equal to the personal allowance (£12,570) may no longer be the most tax-efficient approach. With the increased National Insurance burden, it might make sense to reduce your salary to a lower level – perhaps closer to the new National Insurance threshold of £5,000 – and take more of your income as dividends instead.

For example, reducing your salary from £12,570 to £6,000 would save you approximately £914 in employer’s National Insurance annually. You’d need to ensure your company has sufficient profits to pay the equivalent amount as dividends, but for many profitable businesses, this adjustment could provide significant savings.

However, there’s a balancing act here. Taking a very low salary affects your state pension contributions and may impact mortgage applications or other situations where you need to demonstrate earned income.

Making the most of pension contributions

One often-forgotten strategy is using employer pension contributions more strategically. These contributions avoid both employer and employee National Insurance, making them highly tax-efficient at the moment.

If your company contributes £1,000 into your pension, it saves 15% employer National Insurance (£150) while you avoid both employee National Insurance and income tax on that contribution. For higher-rate taxpayers, this represents a powerful way to extract value from the company while building long-term retirement savings.

The annual allowance for pension contributions is £60,000 for most people, and you can even carry forward unused allowances from previous years. A manufacturing client in Canterbury increased his employer pension contribution to £15,000 last year, saving over £2,000 in combined National Insurance whilst boosting his retirement planning.

Timing your changes carefully

If you’re planning to adjust your salary and dividend strategy, timing matters. Changes to your salary need to be processed through PAYE, so you’ll want to implement any reductions sooner rather than later to maximise the annual savings.

For dividends, remember that these can only be paid from available profits, and they need proper documentation including board minutes and dividend vouchers. It’s also worth considering spreading dividend payments across the tax year to help with cash flow and potentially make use of different tax years’ allowances.

Long-term planning for a more secure future

These National Insurance changes aren’t just a one-year blip – they represent a fundamental shift in the cost of running a small, limited company. This means your long-term business planning needs to account for these higher baseline costs.

Reviewing your business structure

For some sole directors, these changes might prompt a genuine question about whether a limited company remains the optimal structure. While limited companies still offer significant advantages – limited liability, potential tax efficiency, and professional credibility – the gap has narrowed.

If your annual profits are relatively modest (say, under £30,000), it might be worth having a conversation with your accountant about whether reverting to sole trader status could be beneficial. However, for many profitable businesses, the limited company structure still offers the best overall package, especially when you factor in flexibility around dividend timing and pension contributions, but you should always seek professional advice before making any business structure decisions.

Planning for growth

If you’re planning to hire employees in the future, these National Insurance changes make workforce planning even more critical. The true cost of employing someone on a £25,000 salary is now £3,750 in employer National Insurance alone – that’s £312 per month before you even consider pension contributions, equipment, or training costs.

This doesn’t mean you shouldn’t grow your team, but it does mean you need to build these costs into your pricing strategy and cash flow planning more carefully than ever. You might decide that outsourcing to a freelancer could be a better option.

Why professional support is essential

The landscape for small business tax planning has become significantly more complex. The days when you could simply follow a standard formula for salary and dividends are largely gone. Each business now needs a more tailored approach that considers pension planning, cash flow requirements and long-term business goals alongside immediate tax implications.

We’ve noticed that clients who try to figure out these changes alone often miss opportunities for optimisation or, worse, make decisions that create compliance issues down the line. The potential savings from proper planning – often thousands of pounds annually – far outweigh the cost of professional advice.

Making the best of a difficult situation

The 2025 National Insurance changes don’t have to derail your business plans, but they do require careful consideration. Every sole director’s situation is unique, and the optimal model depends on your company’s profitability, your personal financial goals, and your long-term business plans.

What’s clear is that the “set it and forget it” approach to director remuneration no longer works. Regular reviews of your salary and dividend strategy have become essential, not optional.

If you’re feeling overwhelmed by these changes, remember that you’re not alone. We’re helping business owners across Kent with these concerns every day, and no question is too silly when it comes to protecting your hard-earned profits.

Need help working out the optimal salary and dividend strategy for your business?

Contact Adams Accountancy today for a free 15-minute consultation. We’ll look at your specific situation and help you minimise the impact of these National Insurance changes while keeping your business compliant and profitable. After all, that’s exactly what we’re here for, and any other small business questions you might have.