In October 2024, the Chancellor of the Exchequer, Rachel Reeves, announced that the Labour Government would be asking companies to pay NI at 15% on salaries above £5,000 from April 2025, up from 13.8% on salaries above £9,100. Rising National Insurance (NI) contributions pose an increasing challenge for businesses already dealing with economic uncertainty. As employers are responsible for covering a portion of their employees’ NI payments, any increase in these rates leads to higher payroll costs. For businesses already struggling with inflation, rising interest rates, and increased operational expenses, this additional burden may make it more difficult to meet tax obligations, particularly where cash flow is already stretched.

As financial pressures mount, some directors may prioritise other business expenses over NI contributions or may delay payments in the hope that cash flow improves. However, such actions could be interpreted as misconduct, particularly where a company continues trading despite an inability to meet its liabilities.

Directors are legally responsible for ensuring their companies remain compliant with all tax and financial obligations, including the timely payment of NI contributions. Failure to do so can result in serious consequences, ranging from financial penalties to personal liability and disqualification under the Company Directors Disqualification Act 1986. When a company fails to meet its tax obligations, directors found to have acted improperly or negligently could be disqualified from holding directorships or being involved in the promotion, formation, or management of a company, for a period of up to 15 years. Disqualification is therefore a serious sanction that can also affect an individual’s career and professional reputation.

This article explores how increasing NI costs could elevate the risk of director disqualification and the steps directors should take to mitigate that risk.

How Increasing National Insurance Contributions Impact Businesses

National Insurance contributions represent a significant overhead for businesses, particularly those with larger workforces. Increases in NI rates mean that businesses must allocate more of their budgets to payroll taxes, reducing the funds available for other operational costs.

For many small and medium-sized enterprises (SMEs), where margins are already tight, an increase in employment costs can lead to cash flow difficulties. Some businesses may attempt to manage these rising costs by reducing staff hours, implementing redundancies, or delaying supplier payments. However, if these measures are insufficient, companies may still struggle to meet tax obligations, including NI contributions.

Sectors that rely heavily on labour, such as hospitality, retail, and manufacturing, are particularly vulnerable to NI increases. These industries often operate with lower profit margins and may find it more difficult to absorb additional payroll costs without passing them on to consumers or making operational cutbacks. Where businesses fail to adjust their financial planning accordingly, they may find themselves in arrears with HMRC, increasing the likelihood of enforcement action.

Directors’ Legal Responsibilities Regarding Tax Compliance

Directors are bound by a set of legal duties set out in the Companies Act 2006, which require them to act responsibly and in the best interests of their company. These obligations become even more pressing when the business begins to experience financial distress. In such circumstances, directors must shift their focus to acting in the best interests of a company’s creditors, including HMRC.

One of the core responsibilities is the duty to exercise reasonable care, skill, and diligence. Directors are expected to take appropriate steps to meet the company’s financial commitments, including tax liabilities. This means actively overseeing the company’s financial position, maintaining proper records, and putting measures in place to meet obligations as they fall due. If directors fail to carry out these tasks, and the business accumulates unpaid debts as a result, they may be seen to have acted improperly.

Another key duty arises when the risk of insolvency becomes apparent. At that point, directors must act in the best interests of the company’s creditors. Prioritising shareholder returns or continuing with business-as-usual decisions can lead to serious consequences if the company is no longer able to meet its debts. Decisions taken after insolvency has become likely are subject to close scrutiny, and directors can be held personally responsible if those decisions result in avoidable losses to creditors.

In addition, directors are required to avoid wrongful trading. This occurs when they permit a company to continue operating despite knowing - or having reasonable grounds to conclude - that it is unable to pay its debts as they fall due. Examples include continuing to trade while defaulting on NI contributions, or choosing to pay other creditors while deliberately ignoring tax liabilities.

Failure to comply with these legal duties can prompt enforcement action from HMRC and disqualification proceedings on behalf of the Secretary of State for Business and Trade.

How Financial Struggles Increase the Risk of Non-Compliance

When a business faces financial pressure, directors often find themselves under considerable strain to make choices about which payments to prioritise. In situations where cash flow is tight, some directors may decide to delay certain obligations in order to keep the business operational. One common area where delays occur is with NI contributions. While this might seem like a temporary solution to protect jobs, continue trading, or maintain supplier relationships, it introduces serious legal risks - particularly given HMRC’s reputation as a forceful creditor with extensive enforcement powers.

Companies that repeatedly delay or miss NI payments may find themselves subject to penalties and interest charges from HMRC. These additional costs increase the company’s overall tax burden, compounding financial issues and making repayment even more difficult. If this behaviour continues, HMRC may initiate enforcement proceedings, such as issuing a winding-up petition, which can ultimately lead to the compulsory liquidation of the company.

Poor financial planning also plays a role in non-compliance. Businesses that lack clear and accurate cash flow forecasts may not identify financial problems early enough to take corrective action. Without visibility over their financial position, directors may inadvertently accumulate tax debts, only realising the scale of the issue when enforcement action becomes unavoidable.

Another pattern seen in financially struggling businesses is the prioritisation of other creditors over HMRC. While it might seem commercially sensible to pay rent or suppliers first in order to continue trading, doing so while neglecting NI contributions can be interpreted as a deliberate avoidance of tax liabilities. This kind of decision-making may later form the basis for claims of wrongful trading, especially if the company becomes insolvent.

Avoidance of engagement with HMRC is another contributing factor. Directors may fear that opening discussions with HMRC will lead to aggressive enforcement or expose them to scrutiny. However, failing to communicate or respond to payment demands removes the opportunity to arrange a repayment plan and may instead accelerate legal action. Non-engagement is likely to result in HMRC escalating the situation, thereby increasing the risk of company insolvency.

HMRC Enforcement and the Risk of Director Disqualification

If the penalties and interest charges imposed by HMRC are not addressed, HMRC can apply to the courts for a winding-up petition. This step initiates a compulsory liquidation process where the company’s assets are sold to satisfy its debts. At that point, directors lose control of the business. HMRC does not need to wait for other creditors to act - its status as a preferential creditor means it often leads enforcement efforts when tax debts remain unpaid.

In more serious cases, HMRC may pursue directors personally. If the agency believes that directors have acted dishonestly or negligently in failing to meet their tax obligations, it can issue a Personal Liability Notice (PLN). This legal tool allows HMRC to hold directors personally liable for unpaid NI contributions. A PLN can have long-lasting financial consequences for the individual involved, including personal bankruptcy in some cases.

HMRC may also refer cases to the Insolvency Service to investigate a director’s conduct prior to a company entering liquidation or administration. Where a director’s conduct is found to have contributed to a company’s failure to meet its tax obligations, they can be disqualified from acting as a director or managing a company for a period ranging from two to 15 years.

Steps Directors Can Take To Reduce the Risk Of Disqualification

Directors who act responsibly and proactively during periods of financial stress can reduce the risk of enforcement action, personal liability, and exposure to disqualification action. One of the most effective ways to do this is through regular and realistic cash flow forecasting. By maintaining a clear understanding of the company’s financial position, directors can identify issues early and take steps to address them before debts become unmanageable.

Seeking professional advice at an early stage is also essential. Accountants and insolvency practitioners can offer practical guidance on managing tax liabilities and may help directors develop a workable plan to avoid further deterioration of the company’s financial health, such as requesting a Time to Pay (TTP) arrangement. Their input may also be useful in dealing with HMRC, particularly when negotiating repayment arrangements. Engaging directly with HMRC should be viewed as a protective measure rather than a risk.

Maintaining accurate financial records also plays a protective role. If allegations of misconduct arise, directors who can show that they have kept proper records and made informed decisions are more likely to defend their position successfully. This documentation can support the view that they acted with due care and in the interests of the business.

Finally, directors should be aware of the risks of trading while insolvent. Continuing to incur liabilities when there is no reasonable prospect of repayment may leave directors open to personal liability or disqualification. If insolvency appears inevitable, directors should seek advice on voluntary liquidation options or restructuring mechanisms that allow for an orderly wind-down of the business. Taking action early may help preserve personal and business reputations while limiting exposure to further legal consequences.

Where financial distress is unavoidable, seeking legal and financial guidance at an early stage is essential. Sound legal advice will allow directors to mitigate potential liability and protect both the business and the director’s personal position.