One of the biggest announcements in the Budget was the increase in employers’ National Insurance Contributions (NICs) from April 2025, which will result in serious cost increases for the majority of employers affected. Employers will pay NICs on an employee’s earnings above £5,000 at the rate of 15%, but the employment allowance will be increased for some employers to £10,500 a year to help shield small businesses from the increase.
Employers currently pay 13.8% secondary class 1 NICs on the amount that an employee’s earnings exceed the secondary threshold of £9,100 per year – or £175 per week. But the secondary threshold will reduce to just £96 from April 2025 equivalent to £5,000, which will significantly increase the amount that employers need to pay.
The estimate is that this measure will raise around £25 billion from employers over the next five years.
How will this affect employers’ costs?
The larger NICs payments for employers is set to have a significant impact on many businesses. Around 250,000 businesses will see their NICs contributions decrease, but the vast majority – around 940,000 – will see it increase. A further 820,000 employers should see no change, according to Government figures.
The extra costs mean employers will pay an extra £770 in NICs for each minimum wage worker, and £900 more for workers on a median wage. These costs will need careful balancing against other expenses to ensure the impact can be absorbed without any detriment to the business.
The extra allowance for eligible employers could reduce their NICs liability to zero. The current £100,000 threshold for this extra allowance to apply will also be removed from April 2025.
Is there a way to offset these extra costs?
Businesses will be looking at ways to reduce the impact of these changes, and there is one thing that can be done. For example, salary sacrifice – also known as salary exchange – allows employees to direct some of their pre-tax salary to non-cash benefits. These can include pensions, or gym memberships, the cycle to work scheme, or even cars.
By using salary sacrifice, some employees may be able to save money on items they would otherwise buy from their taxed salary. The other benefit is that it will reduce the amount of salary an employee is deemed to have earned, and this can reduce the impact of the increase in employers NICs.
By diverting some of their salary to extra pension contributions, cycle to work schemes and gym memberships, there is a benefit to both the employer and employee, as they are buying these items through pre-tax income, which creates a bigger saving for them too.
We can help you
If you are a Sole Trader, Limited Company or SME and likely to be affected by the NICs increase, then please get in touch and we will help you identify the different ways you can deal with this more effectively.
