Britain celebrates entrepreneurship and flexible working. But rising employment costs, National Insurance rules and the treatment of small limited companies raise an uncomfortable question: are we making it harder for people to work for themselves?
Running a limited company has given me a practical understanding of the responsibilities that come with operating a business. Beyond finding customers and delivering work, there are accounts to manage, taxes to consider and financial decisions that rarely attract much attention outside the business community.
One issue that recently caught my attention was the cost of employer National Insurance contributions when paying salaries through a limited company.
It wasn't simply the additional expense itself that interested me. It was the wider implications for people operating much smaller businesses, particularly those who are just starting out or trying to establish an independent source of income.
For a well-established business, an additional annual expense may be relatively manageable. For a new entrepreneur, freelancer or owner-director working with limited resources, the same amount could represent a meaningful financial burden.
That raises a question worth exploring: if Britain wants to encourage entrepreneurship and more flexible ways of working, does its tax system sufficiently recognise the circumstances of people building businesses on their own?
The National Insurance Changes That Deserve More Attention
In April 2025, significant changes to employer National Insurance contributions came into effect.
The rate employers pay increased from 13.8% to 15%, while the annual earnings threshold at which employer contributions generally become payable fell from £9,100 to £5,000.
Those rules remain in place during the 2026/27 tax year.
The reduced threshold is particularly important because it means employer National Insurance can become payable on comparatively modest salaries, rather than only on higher earnings.
Consider a hypothetical company paying an annual salary of £20,000.
Under the 2024/25 rules, its employer National Insurance liability on that salary would generally have been £1,504.20 before any reliefs.
Under the 2026/27 rules, the equivalent figure is £2,250.
That represents an increase of £745.80 annually for the same salary, assuming standard employer National Insurance treatment and no offsetting allowances.
Although the amount might appear relatively small when compared with the finances of a larger organisation, it can matter considerably to a business operating on tight margins.
And this is only the additional cost associated with one salary. It does not include the wider expenses of running a company, such as accountancy, insurance, software, equipment or other business overheads.
The changes were introduced to raise revenue for public services and address pressures on the public finances. Those are legitimate considerations. But their economic impact also depends on how different businesses absorb the additional costs.
HMRC's published explanation of the changes sets out the revised rates, thresholds and accompanying employer support measures.
The Overlooked Position of Single-Director Limited Companies
One of the most interesting aspects of the system is how differently smaller businesses can be treated depending on their structure and employment arrangements.
The Employment Allowance enables eligible employers to reduce their annual employer National Insurance liability by up to £10,500.
That is a substantial allowance, and its increase from £5,000 in April 2025 provides meaningful support for many businesses employing staff.
However, there is an important exception.
A limited company with one director cannot claim Employment Allowance if that director is the only employee whose earnings create a liability for employer Class 1 National Insurance.
In other words, an individual running their own incorporated business may face employer National Insurance on their salary without access to the relief available to many other businesses.
This is not a new exclusion introduced in 2025, but the higher contribution rate and lower threshold have made its financial consequences more noticeable.
It is also important to recognise that a single-director company is not necessarily excluded forever. If it employs another qualifying person whose earnings create an employer National Insurance liability, it may become eligible, subject to HMRC's conditions.
Nevertheless, the distinction raises an interesting question.
Should the smallest incorporated businesses, often consisting of one individual doing everything from sales to administration, have a different level of access to support simply because of the way they are structured?
There are reasons for eligibility rules, including preventing inappropriate claims and targeting relief towards employment. But those rules can also create differences between businesses that, from the owner's perspective, face similar financial pressures.
The government's guidance for single-director companies explains precisely when the exclusion applies.
Self-Employed Does Not Always Mean the Same Thing
Another complication is that the term self-employed is frequently used to describe very different working arrangements.
A sole trader and the director of a limited company may both describe themselves as working for themselves, but they do not pay National Insurance in the same way.
Sole traders generally pay Class 4 National Insurance on taxable business profits above £12,570. For the 2026/27 tax year, the main rate is 6% on profits between £12,570 and £50,270, followed by 2% above that level.
A limited-company director, meanwhile, is normally treated as an employee for National Insurance purposes when receiving a salary. This can create both employer and employee National Insurance liabilities depending on earnings.
Dividends have different tax treatment and do not themselves attract National Insurance contributions, although they are generally paid from company profits after Corporation Tax and may be subject to dividend tax personally.
It would therefore be misleading to suggest that every self-employed person has suddenly become liable for employer National Insurance.
The reality is more complicated. Different business structures produce different tax outcomes, while personal circumstances and the way income is taken can significantly affect the overall position.
For someone considering whether to operate as a sole trader or establish a limited company, these distinctions can influence their decisions from the outset.
Why Smaller Businesses Feel Financial Pressures Differently
Business costs are rarely experienced equally.
A larger organisation may have established revenue streams, access to finance, employees sharing responsibilities and greater capacity to absorb unexpected expenditure.
A sole director starting a business might have none of those advantages.
They could be working from home, building a customer base, reinvesting early profits and handling most administrative responsibilities themselves.
For these individuals, an additional annual expense is not necessarily insignificant simply because the monetary amount appears modest.
It could affect how much money remains available for equipment, marketing, professional services or maintaining a financial buffer during quieter periods.
The wider pressure on smaller businesses is evident in official research.
The government's Longitudinal Small Business Survey 2025, published in October 2026, found that 67% of SME employers identified taxation, VAT, PAYE, National Insurance and business rates as a major obstacle to business success, compared with 61% in 2024.
That finding covers several forms of taxation rather than National Insurance alone. Nevertheless, it illustrates the extent to which the overall tax burden has become a concern among smaller employers.
A separate National Survey of Businesses covering June to August 2026 also identified high taxes, National Insurance or business rates among the commonly reported challenges for businesses with employees.
The important issue is not simply whether businesses can afford an individual tax increase.
It is the cumulative effect of financial obligations on their confidence, capacity to invest and willingness to expand.
Could Higher Employment Costs Undermine Flexible Working?
The implications extend beyond company directors and business owners.
Britain's working environment has changed substantially. Freelancing, remote work, project-based contracts and independent consultancy have created opportunities for people to earn a living outside traditional employment arrangements.
As discussed in Agile's examination of the shift towards flexible working models, flexibility increasingly shapes how organisations operate and how individuals structure their working lives.
But flexible working does not exist independently of economic conditions.
A consultant running a small limited company may be reluctant to increase their fixed costs if demand is unpredictable. A microbusiness owner considering their first employee may have to weigh salary, National Insurance, pension contributions and other obligations against expected revenue.
Some employers will benefit substantially from Employment Allowance, so higher headline contribution rates do not automatically translate into larger National Insurance bills for every small business.
Others, however, may face increased costs that influence investment, pay or recruitment decisions.
The Office for Budget Responsibility has assessed how the higher employer National Insurance burden could feed through into lower real wages, higher prices, reduced profits and employment decisions over time.
Those assessments are economic forecasts rather than evidence that every employer has responded in the same way.
Still, they demonstrate why employment taxes matter beyond the payroll department.
When the cost of operating or expanding a business changes, the consequences can spread throughout the labour market.
The Other Side: Why Employment Taxes Exist
It would be too simplistic to portray National Insurance contributions as an unnecessary obstacle without considering their purpose.
National Insurance is an important part of the UK's tax system and supports the funding of public expenditure, while certain contribution records are relevant to eligibility for contributory benefits and the State Pension.
Government must balance competing priorities, including maintaining public services, raising revenue and encouraging economic activity.
The increased Employment Allowance was itself designed to offset higher employer liabilities for eligible businesses.
There is also a legitimate argument that the tax system needs safeguards around incorporated businesses, particularly where directors can choose different methods of taking income.
If reliefs were extended indiscriminately, they could create new opportunities for tax avoidance or reduce revenue without necessarily generating more employment.
These considerations should be part of any discussion about reform.
The central question is not whether businesses should contribute towards public finances.
It is whether the distribution of those contributions is sufficiently balanced, particularly for individuals at the earliest stages of building a company.
Is Britain Making Entrepreneurship Less Attractive?
Entrepreneurship often begins with modest ambitions.
Not everybody starting a business wants to build a large corporation or employ dozens of people.
Some want the independence to choose their customers, control their working hours or build a sustainable business around a specialist skill.
Others are creating companies as a route away from conventional employment, perhaps because of caring commitments, geographical circumstances or the desire for greater autonomy.
That diversity is part of the modern economy.
Yet the decision to work independently involves uncertainty. Business owners must find work, manage inconsistent revenue, deal with administration and accept financial risks that employees do not usually encounter in the same form.
National Insurance is only one part of that calculation. Taxation, regulatory compliance and business operating costs all contribute to the broader picture.
A system that becomes more expensive or complicated for certain small businesses may affect how attractive incorporation appears, even where the overall financial differences are relatively modest.
But the case is not uniform. Sole traders face different rules, and employers eligible for Employment Allowance may be well protected from the rise in headline employer contributions.
The challenge is understanding where the system provides effective support and where gaps remain.
What Would a More Supportive System Look Like?
There are several approaches worth examining in the continuing discussion about employment taxation.
One possibility is reconsidering how Employment Allowance eligibility applies to the smallest incorporated businesses, including single-director companies.
Another is exploring targeted relief during the earliest years of trading, when cash flow can be unpredictable and access to finance limited.
Simplifying the guidance available to people moving between sole-trader and limited-company arrangements could also help them make better-informed decisions.
However, each proposal comes with trade-offs. Reliefs cost money, eligibility thresholds can create new distortions, and changes intended to support small businesses must be considered alongside tax fairness and the potential for misuse.
Any serious reform debate therefore needs evidence of the economic benefits, the potential revenue cost and the likely behavioural consequences.
The objective would be to understand how the tax system could support genuinely productive independent work without creating unfair advantages between otherwise comparable workers.
The Future of Work Depends on More Than Flexibility
My interest in this issue began with something fairly ordinary: examining the financial obligations associated with paying a salary through a limited company.
But it led to a much broader question about the environment Britain creates for people who want to work independently.
The rise of flexible working is often discussed in terms of remote technology, changing workplace expectations and the freedom to organise our time.
Those developments matter. Yet true flexibility also depends on whether individuals can establish and sustain viable businesses.
National Insurance contributions are not the sole determinant of entrepreneurship, and not every small business is disadvantaged by the current arrangements.
Nevertheless, the different treatment of sole traders, single-director companies and eligible employers deserves greater public understanding.
Britain can celebrate entrepreneurial ambition while also examining whether its tax system creates unnecessary financial barriers for some of the smallest businesses.
If flexible work is going to remain an important part of the UK economy, the conversation needs to extend beyond where people work and when they work.
It also needs to consider what it costs them to work independently in the first place.
