Running an online business since 2013 has taught me that the obvious costs aren't always the ones that catch you out.
Hosting, software, accountancy and subscriptions are all relatively predictable. You know they're coming, and you budget accordingly.
But recently, while looking at the National Insurance costs associated with paying a salary through a limited company, something caught my attention.
A company with just one director can find itself paying employer National Insurance without qualifying for the allowance available to many other employers.
And the more I looked into it, the more I wondered whether the system was really designed with the smallest companies in mind.
The Cost of Paying Yourself a Salary
Since April 2025, the standard employer National Insurance rate has been 15%, with contributions generally becoming payable on annual earnings above £5,000.
Those rules remain in place for the 2026/27 tax year.
That means a limited company paying somebody a salary of £20,000 could face an employer National Insurance bill of £2,250 annually, before any applicable relief.
Under the previous 2024/25 rules, the equivalent figure would have been £1,504.20.
That's an additional £745.80 a year for exactly the same salary.
It might not sound enormous, but imagine somebody who's only recently launched a business. Perhaps they're developing websites, providing consultancy services or building a small online shop.
An additional £746 could pay for software, advertising, equipment or simply provide a little breathing space.
And that's before considering the other costs of running a company.
The Employment Allowance Question
Here's where things become particularly interesting.
Eligible employers can reduce their employer National Insurance liability by up to £10,500 through the Employment Allowance.
For many small businesses, that can make a substantial difference.
But a limited company with only one director cannot claim it if that director is also the only employee generating an employer National Insurance liability.
In other words, somebody operating a company entirely on their own could face a National Insurance bill that an otherwise eligible business employing additional people might be able to offset. The exclusion isn't new — it's been part of the system since 2016 — and you can check the current rules in HMRC's Employment Allowance eligibility guidance.
However, the higher employer contribution rate and lower earnings threshold introduced in 2025 have made its consequences more noticeable.
I understand why governments need to raise revenue, and why tax reliefs require safeguards.
But I also think there's a reasonable question here: shouldn't the smallest incorporated businesses receive more consideration when employment costs increase?
What Does This Mean for Your Company?
The actual cost depends on your salary, company structure and eligibility for relief.
Rather than simply looking at headline tax rates, I think it's useful to compare the costs directly.
Employer NI Calculator
Compare annual employer National Insurance costs in 2024/25 and 2026/27.
2024/25 gross NI
£1,504.20
2026/27 gross NI
£2,250.00
Increase in gross employer NI
+£745.80
Illustrative calculation using standard Class 1 employer rates and annual thresholds. Assumes a full tax year; excludes special reliefs and other payroll circumstances. The 2024/25 figure is before any Employment Allowance. The eligibility checkbox assumes the business can claim the full 2026/27 allowance.
Enter an annual salary to see the estimated employer National Insurance liability under the 2024/25 rules compared with 2026/27, including the difference between them.
The calculator should also explain how Employment Allowance could affect the result for eligible businesses.
It's a straightforward way to see what has changed rather than relying on percentages alone.
Paying More National Insurance Can Still Make Financial Sense
There's an important distinction worth making here. Just because a sole director faces an additional National Insurance bill doesn't automatically mean taking a lower salary is the most tax-efficient option.
For 2026/27, a director paying themselves £12,570 would generally pay no personal Income Tax or employee National Insurance on that salary, assuming their full Personal Allowance is available.
Their company, however, would owe £1,135.50 in Employer National Insurance.
The advantage is that both the salary and Employer NI are normally deductible business expenses, reducing the company's Corporation Tax liability. Depending on profits and how the director extracts money, a £12,570 salary can therefore work out more efficiently than taking a smaller salary and more dividends.
I've run a limited company since 2013, and I think this distinction matters. There are perfectly legitimate ways to reduce the overall tax burden, but that doesn't change my underlying criticism: why should a one-person company face an Employer NI bill that a larger qualifying business could offset through Employment Allowance?
Tax efficiency and fairness aren't necessarily the same thing.
2026/27 Director Salary Comparison
Compare two salary strategies side by side — including dividends and take-home pay.
Corporation Tax: auto-calculated (marginal relief on £5k strategy, marginal relief on £12.5k)
| Annual amount | £5,000 salary | £12,570 salary |
|---|---|---|
| Director salary | £5,000 | £12,570 |
| Employer NI | £0.00 | £1,135.50 |
| Total company cost | £5,000.00 | £13,705.50 |
| Profit after salary costs | £79,000.00 | £70,294.50 |
| Corporation Tax | £17,185.00 | £14,878.04 |
| Dividends available | £61,815.00 | £55,416.46 |
| Personal tax & employee NI | £0.00 | £0.00 |
| Dividend tax | £9,913.84 | £10,332.63 |
| Take-home pay | £56,901.16 | £57,653.83 |
On these inputs, the £12,570 salary leaves you £752.67 better off per year.
Illustrative 2026/27 figures, assuming all remaining post-tax profit is drawn as dividends and a full Personal Allowance is available. Corporation Tax is calculated automatically from taxable profits — 19% up to £50,000, marginal relief to £250,000, 25% above — assuming no associated companies and a full accounting year. No Employment Allowance. Note: a £5,000 salary alone is below the National Insurance Lower Earnings Limit and would not normally generate a qualifying State Pension year. Actual outcomes depend on company circumstances and other income.
Small Businesses Deserve a Fair Discussion
I'm not suggesting that running a limited company should automatically mean paying less tax.
Nor is employer National Insurance the only consideration when deciding how to structure a business. Salaries, dividends, Corporation Tax and personal circumstances all matter.
But I do think we should pay more attention to how policy changes affect people operating at the smallest end of the business community.
Britain regularly talks about encouraging entrepreneurship. That's welcome.
Yet supporting entrepreneurship should also mean understanding the cumulative costs of establishing and maintaining a business, especially before it has grown enough to employ others. I've explored the broader implications for independent workers in my Agile article on the hidden cost of self-employment.
For me, this particular National Insurance issue highlights something worth remembering: a small business doesn't necessarily have small responsibilities, even when there's only one person running it.
