On the 30th of October 2024, Chancellor Rachel Reeves introduced measures to increase Employer National Insurance Contributions (NICs) as part of the Autumn Budget.
This increase, combined with additional employment-related costs, has significant implications for businesses and poses new challenges for managing wage budgets effectively.
In this week’s Tax Tuesday, we break down the changes, examine the potential impact on businesses, and offer an example calculation to help employers better understand how these adjustments might affect their payroll expenses.
What are the changes to NIC?
Starting April 2025, employers will face a two-pronged change in NIC obligations:
- The employer NIC rate will rise by 1.2 percentage points, shifting from 13.8% to 15%.
- The earnings threshold at which employers begin paying NICs will be reduced from £9,100 to £5,000 per year, meaning a larger portion of wages will be subject to NICs.
These measures are estimated to generate approximately £25 billion annually for the Treasury, supporting various government priorities. However, they also raise significant considerations for business owners, who now have a critical window to assess their financial strategies.
To soften the impact on smaller businesses, the Employment Allowance – a tax relief that allows eligible businesses to reduce their NIC bill – will increase from £5,000 to £10,500. This boost offers some relief, but it may not fully counteract the increased costs associated with these NIC changes, especially for businesses with substantial payrolls.
Implications for Business Owners
With the April 2025 start date, businesses now have time to forecast the impacts of these changes on their finances. For many, this increase in NICs could mean an expanded cost burden, particularly when considered alongside other rising employment costs.
Here are some likely implications:
- Impact on wage budgets: Employers will face increased payroll costs as more of their employees’ earnings fall within the NIC threshold. For businesses already feeling the strain of rising National Minimum Wage (NMW) rates and potential reforms in employment law, these NIC changes will stretch wage budgets further. Some employers may reconsider annual wage increases or seek ways to balance payroll costs to sustain business viability.
- Potential for higher consumer prices: As labour costs increase, businesses might explore options to maintain profit margins. This could include raising prices, potentially leading to higher costs for consumers. Small to medium-sized enterprises, in particular, may find it challenging to absorb these expenses without passing some of them on.
- Reviewing financial strategies: Now is the time for businesses to assess their financial strategies. By forecasting NIC changes and planning accordingly, employers can identify cost-control measures and potential efficiency improvements to manage this new expense. Restructuring roles, re-evaluating hiring plans, or investing in technology to streamline operations are potential strategies to offset the increase.
Working example
To help clarify the financial impact, here’s a sample calculation based on the announced NIC rate changes. In this case, we consider a retail company employee on a salary of £25,000:
- Business: Retail company
- Employee Annual Salary: £25,000
- Current NIC Threshold: £9,100
- Future NIC Threshold (April 2025): £5,000
- Current NIC Rate: 13.8%
- Future NIC Rate (April 2025): 15%
Current NIC calculation (up to April 2025):
- Salary subject to NIC = £25,000 – £9,100 = £15,900
- NIC at current rate (13.8%) = £15,900 * 0.138 = £2,194.20
Future NIC calculation (effective April 2025):
- Salary subject to NIC = £25,000 – £5,000 = £20,000
- NIC at new rate (15%) = £20,000 * 0.15 = £3,000
In this example, the employer’s NIC contribution for this employee increases from £2,194.20 to £3,000, representing an additional annual cost of £805.80 per employee.
If the company employs 20 people at a similar salary level, the increase could result in an added annual NIC expense of approximately £16,116 for the business.
How can we help?
The upcoming changes reiterate the need for proactive financial planning. Employers can consider several strategies to manage costs effectively such as: evaluating staffing levels and structure, exploring technology and automation, adjusting pricing strategies, making use of Employment Allowance, forecasting and budgeting proactively.
For many businesses, understanding the full implications of these NIC changes requires careful analysis and strategic planning.
If you’re concerned about managing these increased costs or need guidance on how best to adjust your financial strategies, now is the time to seek professional advice. Working with your accountant can help you forecast the impact on your budget, identify potential savings, and explore tax reliefs like the Employment Allowance.
Contact your relationship principal, email tax@haroldsharp.co.uk or call 0161 905 1616.