The Biggest Employment Tax Rise in a Decade
From 6 April 2025, the rate of employer National Insurance contributions increased from 13.8% to 15%, while the threshold at which employers start paying was slashed from £9,100 to £5,000 per employee per year.
This is the most significant increase in employment costs in over a decade, and it hits hardest for sole traders and small businesses considering hiring their first employee.
What Actually Changed
| Before April 2025 | From April 2025 | |
|---|---|---|
| Employer NIC rate | 13.8% | 15% |
| Secondary threshold | £9,100/year (£175/week) | £5,000/year (£96/week) |
| Employment Allowance | £5,000 | £10,500 |
The lower threshold means employers now pay NICs on a much larger portion of each employee's salary. Combined with the higher rate, the impact is substantial.
How Much More Does It Cost to Employ Someone?
Let's calculate the employer NIC cost for different salary levels:
Employee earning £25,000/year
Before April 2025:
- (£25,000 - £9,100) × 13.8% = £2,194.20
From April 2025:
- (£25,000 - £5,000) × 15% = £3,000.00
Additional cost: £805.80 per year (+37%)
Employee earning £35,000/year
Before: (£35,000 - £9,100) × 13.8% = £3,574.20After: (£35,000 - £5,000) × 15% = £4,500.00Additional cost: £925.80 per year
Employee earning £50,000/year
Before: (£50,000 - £9,100) × 13.8% = £5,644.20After: (£50,000 - £5,000) × 15% = £6,750.00Additional cost: £1,105.80 per year
These are significant increases, especially for sole traders making their first hire.
The Employment Allowance Lifeline
To soften the blow for smaller employers, the government increased the Employment Allowance from £5,000 to £10,500 per year. This is an annual credit against your employer NIC liability.
Who qualifies?
- Employers with a total employer NIC bill in the previous tax year (the £100,000 eligibility cap has been removed)
- Sole traders are eligible if they employ staff
- You cannot claim it if your only employee is a director with no other staff
What this means in practice:
If you're a sole trader with one employee earning £30,000:
- Employer NICs: (£30,000 - £5,000) × 15% = £3,750
- Employment Allowance: -£3,750 (capped at actual liability)
- Net employer NIC cost: £0
The increased Employment Allowance means most sole traders with 1-2 employees will pay little or no employer NICs. It's only once your total payroll NIC liability exceeds £10,500 that you start paying.
Impact on Hiring Decisions
The ICAEW notes that around 940,000 employers will see their NIC liability increase, while 250,000 will see it decrease (thanks to the Employment Allowance). For the self-employed community, the key impacts are:
If You're Considering Your First Hire
The Employment Allowance largely shields you. For a single employee earning up to about £75,000, the allowance covers most or all of the employer NIC. Don't let the headline "15%" scare you away from hiring if your business needs it.
If You Have Multiple Employees
The costs add up faster once you exceed the Employment Allowance. For 3-4 employees, you'll likely exhaust the £10,500 allowance and start paying the full 15% rate.
If You're Thinking About Contractors
The increased cost of employment may push more businesses towards using self-employed contractors rather than employees. However, be extremely careful here - HMRC's IR35 rules determine whether a worker is genuinely self-employed, and getting it wrong can result in penalties.
Alternatives to Hiring
If the NIC costs are prohibitive, consider these alternatives:
Outsource Specific Tasks
Rather than hiring a full-time bookkeeper, use automated accounting software with AI categorisation and bank feeds. You can automate 80% of the bookkeeping work.
Use Freelancers
For project-based work (design, development, marketing), using genuinely self-employed freelancers avoids employer NICs entirely. Just ensure the engagement passes the IR35 tests.
Invest in Automation
Before hiring an admin assistant, ask whether software can do the job:
- Automated invoicing instead of manual billing
- Bank feeds instead of manual data entry
- AI categorisation instead of manual bookkeeping
- Mileage tracking instead of manual expense logging
How TaxMTD Helps with Payroll
If you do hire, TaxMTD's payroll features help you:
- Calculate employer NICs including the Employment Allowance
- Process RTI submissions to HMRC
- Track your total employment costs
- Factor employer NICs into your overall tax position
The Bottom Line
The employer NIC increase is real and significant - 15% with a £5,000 threshold means employment is more expensive than ever. But the doubled Employment Allowance means sole traders making their first hire are largely protected.
Do the maths for your specific situation before making hiring decisions. And consider whether automation can reduce the need for an extra pair of hands.
Further reading: National Insurance for the Self-Employed · UK Interest Rates for Freelancers · Compare TaxMTD