Changes announced below are accurate as of 13/11/2024.
National Insurance Contributions
Employer’s national insurance contributions – also known as secondary NICs – are the taxes paid by employers on the salaries of employees, above an agreed threshold.
Unlike primary, or employee NICs, they are not deducted from salary and thereby represent a real cost for employers.
The current rate of secondary NICs is 13.8%.
The Budget has introduced two changes, which take effect from 6 April 2025 onward:
- Firstly, the rate of tax on employee salaries is to be increased by 1.2% to 15%,
- Secondly – and perhaps more significantly – the threshold at which Employer’s NIC starts to be paid will be reduced from £9,100 to £5,000 per annum.
Whilst an increase in rates to 15% was broadly expected, the slashing of the threshold from £9,100 to £5,000 will represent an additional cost to UK businesses of £615 for every employee earning in excess of £9,100 per year.
Let’s take a look at a worked example:
- The average salary in the UK is £36,000
- Deducting the £5,000 threshold results in £31,000 being subject to employer’s NIC at 15%
- The employer’s NIC cost is £4,650
- In comparison to existing rates this represents an increase of £938 per annum for a single employee on an average wage.
- Whilst corporate tax relief is available – reducing the actual cost to £704 per annum for profit-making companies – there is also a timing difference, resulting in reduced cashflow.
Even for a relatively small business with 20 employees each earning an average wage, the increased expense will be equivalent to £18,760 each year.
(or £14,070 after Corporation Tax Relief).
Many businesses with large staffing costs will find their profitability reduce markedly as a result of this single change.
Employment Allowance
To provide some respite to smaller businesses, the Government will increase the Employment Allowance – an amount which is deductible against Secondary NIC cost – from £5,000 to £10,500. Additionally, the previous eligibility criteria, requiring that total class 1 NICs were less than £100k – will be removed.
While this will provide a degree of relief, it is not as generous as it may first appear. Only businesses employing fewer than six staff, at an average UK salary, will be protected from tax increases. Where employment costs exceed this, the benefits of the increased Employment Allowance will be nullified by the increase in this tax cost.
Other Relevant Changes
National Minimum Wage
Compounding the additional burden on employers as a result of the national insurance contribution changes, is the significant increase in National Minimum Wage (NMW).
Rachel Reeves has announced a 6.7% increase to National Minimum Wagei for over 21 year olds increasing the hourly rate from £11.44 to £12.21 from 6 April 2025. There is an even steeper increase in the rates paid to 18-20 year olds with a 16.3% increase from £8.60 to £10.
Benefits in Kind
Finally, whilst there was some expectation of changes to Benefit in Kind rules, the generous rates applicable to electric vehicles will continue.
However, double cab pickups – which are currently taxed favourably as vans (which face far lower benefit in kind taxation than cars) – will no longer benefit from this treatment, from April 2025 onward.
So What are the Implications for Employers
It is important not to underplay the additional cost that will be incurred by UK businesses as a result of these changes. The total tax raised with this single measure is expected to be £25 billion, which more than covers the budgetary “black hole” in itself.
The businesses most affected will be those operating in a labour-intensive sector with a high staff cost, such as healthcare and financial services. But equally, businesses with high staff numbers and low average wages – such as the hospitality and leisure sector, employing many part time staff – will also be disproportionately impacted. The reduction in the secondary threshold will bring the wages of many lower paid workers into the scope of employer NICs for the first time.
In her Budget speech, the Chancellor stated that Britain was falling behind other countries in the race for new jobs. But increasing the cost of hiring in the UK – while increasing workers protections, and the national minimum wage – will only worsen the position. And it is not only the employers that will bear this cost. The Office for Budget Responsibility (OBR), which monitors the government’s spending plans and performance, has stated that most of the burden from the increase will be passed on to workers through lower or stagnating wages.
How are affected businesses expected to adapt to these changes?
There is unfortunately no simple solution. The increases in overheads resulting from the increased employer’s NICs and Minimum Wage will in may cases be unavoidable, at least in the short term.
Where possible, salary sacrifice schemes should be promoted to staff members as a way to reduce taxable income for both employee and employer. Where exempt or tax efficient benefits are utilised – such as pensions or electric vehicles – it may provide some relief.
In certain circumstances providing staff with equity in the business, such as via share schemes, may help reduce salary overheads as a non-taxable benefit. It may also permit dividends to be paid, on which NICs are not paid. However, this planning is contentious and anti-avoidance rules will often prevent the replacement of salary with dividends.
For genuine owner-managers however, will be important to reconsider your remuneration strategies, and more specifically the split between salary and dividends. Please get in touch with your Xeinadin advisor for assistance.
It remains the case that the changes to employer taxes will bring greater pressure than ever before to reduce UK payroll costs. In the longer term the likely results are:-
- Greater use of self-employed contractors rather than employees. The disguised employment rules would need to be very carefully considered to determine whether this may be feasible.
- Using staff based outside the UK and therefore outside the scope of NICs, and/or
- Reducing staff overheads via other means, such as investment into new technologies such as AI.
These measures are unlikely to be positive for the UK economy in the long term, and in my opinion are likely to represent a huge own goal by the Chancellor.
If you would like to find out more about this area, and how we may be of support, please get in touch with your local Xeinadin advisor.
Written by Adam Owens CTA, Tax Advisory Partner at Xeinadin.
