One of the most controversial policy announcements of the Autumn Budget was the decision to raise employer’s National Insurance Contributions (NICs). From April 6, employer contributions will rise from 13.8% to 15%, while the threshold for NICs will almost half from £9,100 to £5,000.
Employers, trade bodies and business leaders have all been united in criticising the increases and highlighting the negative impact they will have on hard-up companies. The hike in the cost of employment the changes represent has been singled out as the main driver behind a sharp dip in business confidence heading into the new year.
According to one survey of employers and business leaders, 90% expect the changes to NICs to negatively impact them, while two thirds are pessimistic about the overall economic outlook in 2025.
While any rise in costs is bound to impact businesses, one consolation for employers is that the increase has been flagged well in advance. And there is still time to take proactive steps to mitigate any risks to your bottom line once the higher contributions come into force.
Calculating your liability
The first step is understanding clearly what the change in contribution rates means for your business. Your exposure will depend on how many people you employ, and what they earn. For example, for someone on an average £37,000 a year salary, the extra cost for employers works out at around £950 a year. But to understand the full impact, you need to start with a detailed per employee calculation.
Some of these additional costs will be offset by the rise in the Employment Allowance. From April 6, employers will be able to reduce their total NIC bill by £10,500, more than double the current rate of £5,000. This applies to all employers, with the £100,000 contributions threshold being scrapped.
Reducing costs
Once you have a clear view on your cost position, you can look at whether you need to offset higher NICs by reducing costs in other parts of your business, or by increasing prices etc. There has been a lot of talk about employers having to potentially cut jobs to cope with the extra costs. However, these are significant decisions that can have adverse knock-on effects, such as destabilising operational efficiency and service levels, or putting off customers.
There are other options for reducing employment costs that don’t carry the same amount of risk to service levels or operational stability. One is to look at remuneration structures. As higher salaries lead to higher NICs, you might look at offering a mix of benefits, bonuses and non-cash incentives as a way of keeping liabilities under control. This can be particularly effective for promotional structures and performance-related incentives, though you should also be aware of the tax implications of benefits in kind.
Another area to look at, particularly for cost control in the longer term, is workforce planning. It may be that hiring strategies for the next 12 months need to be reviewed in light of higher NIC costs. Depending on the nature of your staffing and skills needs, temporary employment or using freelancers or contractors may work out to be more cost effective than relying solely on full-time hires. You can also look at things like training for existing staff to plug skills gaps, or turning to technology and automation to streamline processes and reduce labour gaps.
Get help from the experts
One final piece of advice would be not to take these important decisions without seeking professional, objective advice. Any threat of rising costs can be daunting for a business in the current climate. With a range of expertise in areas such as cost management, tax planning, payroll and more, Xeinadin’s specialists can help you model various scenarios for offsetting higher NIC liabilities, and put the right plans in place for your business.
