National Insurance Contributions (NI) are payments made by employees, employers, and the self-employed to fund state benefits, including the State Pension, NHS, and statutory payments like sick pay and maternity leave.
For UK agency founders, NI is a significant employment cost that directly impacts your profit margins and pricing strategy. As an employer, you must pay Class 1 Secondary NI on each employee's earnings above the secondary threshold (£9,100 per year for 2025/26). The rate is 13.8% on earnings above this threshold, with no upper limit. This means a salaried employee earning £40,000 costs you an extra £4,258.20 in employer NI alone.
Your employees also pay Class 1 Primary NI at 8% on earnings between the primary threshold (£12,570) and the upper earnings limit (£50,270), then 2% on anything above that. As an agency founder, you must deduct this through PAYE and report it to HMRC each month via RTI (Real Time Information).
If you operate as a sole trader or through a limited company, your own NI position differs. As a sole trader, you pay Class 2 NI at £3.45 per week (2025/26) if your profits exceed £6,725, and Class 4 NI at 6% on profits between £12,570 and £50,270, then 2% above that. As a limited company director, you typically pay yourself a salary up to the secondary threshold (£9,100) to avoid employer NI, then take the rest as dividends. This is a common tax planning strategy, but be aware that dividends do not count towards NI contributions, so you may miss out on certain state benefits.
For agency founders using contractors or freelancers, be careful with IR35 rules. If HMRC determines a contractor is effectively an employee, you become liable for their employer NI contributions plus penalties. Always check the employment status of your workers.
When this matters for agency founders: NI is your second biggest employment cost after salaries, so structuring pay efficiently (salary up to the NI threshold, dividends above) can save thousands each year. It also affects your pricing: if you charge clients £100 per hour, roughly £13.80 of that goes to employer NI before you see any profit. Always factor NI into your project quotes and cash flow forecasts.