Employer National Insurance 2026/27: The 15% Charge, Employment Allowance and What It Costs to Hire

The 15% Rate and Secondary Threshold

Employer Class 1 National Insurance (sometimes called secondary NI) is the contribution paid by employers on top of each employee's wages. In 2026/27 the key figures are:

The formula for calculating employer NI on a single employee is:

There is no upper earnings limit for employer NI — unlike employee NI, which drops to 2% above £50,270, employer NI continues at 15% on all earnings above the secondary threshold, no matter how high the salary.

Employment Allowance: £10,500

The Employment Allowance is a relief that allows eligible employers to reduce their annual employer NI bill by up to £10,500. It was doubled from £5,000 to £10,500 from April 2025, partly to offset the impact of the rate increase and threshold reduction on smaller employers.

The allowance works by offsetting against employer NI liability in real time — each time you run payroll, the Employment Allowance reduces the employer NI due until the full £10,500 is used up. If your total employer NI liability for the year is less than £10,500, you simply pay nothing; you cannot claim a cash refund of the unused balance.

Who qualifies:

• Your employer NI liability was below £100,000 in the previous tax year
• You are not a sole director company with no other employees
• You are not a public authority (excluding charities)
• Your business is not connected to another business that has already claimed the allowance

To claim, tick the "Employment Allowance" box in your payroll software at the start of each tax year, or submit an Employer Payment Summary (EPS) to HMRC. You must re-claim each year — it does not roll over automatically.

Class 1A: NI on Benefits in Kind

When you provide non-cash benefits to employees — company cars, private medical insurance, gym memberships, interest-free loans above £10,000, or employer-paid school fees — you are liable for Class 1A National Insuranceat 15% on the taxable value of those benefits.

Unlike Class 1 NI (paid monthly through payroll), Class 1A is an annual obligation:

• Report each employee's benefits on form P11D by 6 July following the tax year end
• Submit form P11D(b) declaring the total Class 1A liability
• Pay by 22 July electronically (19 July by cheque)

Some benefits are exempt from both income tax and Class 1A NI: employer pension contributions, workplace nursery provision, Cycle to Work scheme equipment (within limits), and approved working-from-home payments (up to £6/week without evidence).

NI on Termination Payments

When an employee leaves employment, termination payments have a specific NI treatment:

• First £30,000: entirely exempt from income tax and NI (both employee and employer), provided the payment is a genuine termination payment and not disguised earnings
• Above £30,000: the employee pays income tax at their marginal rate; the employer pays Class 1A NI at 15% on the excess (not Class 1 — so the employee pays no NI on the excess)

Example: an employee receives a £50,000 redundancy payment. The first £30,000 is tax and NI-free. The £20,000 excess: employee pays income tax at 40% = £8,000; employer pays Class 1A NI at 15% = £3,000. Total cost of the £50,000 payment to the employer: £50,000 + £3,000 employer NI = £53,000.

Pay in lieu of notice (PILON) and post-employment notice pay (PENP) are treated as earnings and taxed in full — both income tax and Class 1 NI apply, with no £30,000 exemption. Employers should calculate PENP carefully to avoid errors.

Salary Sacrifice and Employer NI Savings

Salary sacrifice is one of the most effective ways to reduce employer NI costs. In a salary sacrifice arrangement, an employee gives up part of their gross salary and the employer makes an equivalent contribution (e.g. to a pension, or as a cycle-to-work or EV car scheme benefit). Because the employee's gross salary is reduced, employer NI is calculated on the lower figure.

Many employers pass their NI saving (or part of it) into the employee's pension as an additional contribution. On a £5,000 salary sacrifice, the employer saves £750 in NI — adding £750 extra to the pension costs the employer nothing net, yet provides the employee with a substantially enhanced pension contribution.

Total Employment Cost Calculation

The advertised salary is only part of what an employee costs. Here is a comprehensive breakdown of the mandatory costs for a standard employee in 2026/27:

Beyond mandatory costs, employers typically add recruitment fees (£2,000–£5,000 one-off), equipment and desk space, training, employer liability insurance, sick pay cover, and management time. A conservative "total cost of employment" rule of thumb is headline salary × 1.25 to 1.35.

Impact on Small Businesses

The April 2025 employer NI changes created the most significant increase in employment costs for UK businesses in a generation. The combined effect of the rate rise (13.8% to 15%) and threshold reduction (£9,100 to £5,000) increased employer NI by approximately £865 per employee per year on an average salary of £30,000.

Sectors most affected include hospitality, retail, care homes and cleaning — industries with large numbers of part-time workers on low wages. For many of these businesses, the NI increase on even a modestly paid worker is proportionally large relative to the thin margins they operate on.

Mitigants available to small businesses:

• Employment Allowance: up to £10,500 offset — claim it every year
• Salary sacrifice: pension, cycle-to-work and EV schemes reduce NI base
• Review pay frequency: weekly vs monthly payroll does not change annual NI, but affects cash flow
• Part-time vs full-time: splitting one role across two part-timers does not reduce total NI since threshold applies per employee

Contractors vs Employees: NI Comparison

Using self-employed contractors instead of employees avoids employer NI entirely — but only if the engagement is genuinely outside the employment relationship and (for medium/large businesses) outside IR35.

A contractor charging £500/day for 220 days costs £110,000 — compared with a PAYE employee on an equivalent salary of perhaps £80,000, which costs: £80,000 salary + £11,250 employer NI (15% × £75,000) + £2,388 employer pension = £93,638. The contractor saves £16,362 in employment taxes — but charges a significant day-rate premium to compensate for lack of employment rights, holiday pay and continuity.

Since April 2021, medium and large businesses are responsible for IR35 determinations (off-payroll working rules). If HMRC concludes a contractor is effectively an employee, the business must pay PAYE, employee NI and employer NI on fees paid — plus interest and penalties. IR35 compliance must be managed carefully.

RTI and Payroll Obligations

Under Real Time Information (RTI), employers submit a Full Payment Submission (FPS) to HMRC on or before each pay day. The FPS reports each employee's gross pay, income tax deducted, employee NI, and employer NI. HMRC uses this data to reconcile PAYE and NI records in real time.

Key RTI deadlines:

• FPS: submit on or before pay day
• Employer Payment Summary (EPS): by 19th of month to adjust liability (Employment Allowance, statutory pay recovery)
• PAYE/NI payment: by 22nd of month (electronic) or 19th (cheque) for the previous month
• P60s to employees: by 31 May after end of tax year
• P11D/P11D(b): by 6 July; Class 1A payment by 22 July

Late or inaccurate FPS filings attract penalties — from £100/month for 1–9 employees up to £400/month for 500+ employees. A good payroll software package or an outsourced payroll bureau handles RTI automatically.

Worked Example: Cost of Hiring on £35,000