National Insurance contributions are the second-largest revenue stream for the treasury behind income tax. It is paid by workers and the self-employed on earnings and profits and by employers on top of the wages they pay out.
In the Autumn Budget October 2024, the Chancellor announced an increase in employer National Insurance. From April 2025, employers will pay National Insurance Contributions (NICs) on an employee’s earnings above £5,000 at the rate of 15%. But how will this increase affect employers?
In this blog, you’ll discover how the National Insurance increase impacts your finances, from cost implications to adjustments to make to minimise the impact.
Background to the employer National Insurance increase
Chancellor Rachel Reeves was under pressure to fill the black hole in the public finances by raising taxes in the 2024 Autumn Budget. The Chancellor delivered tax increases amounting to £41 billion by 2029/30. The Labour government promised not to raise taxes on working people by avoiding rises in NI employee contributions, Income Tax and VAT.
However, the Chancellor unveiled a £25bn rise in employers’ National Insurance contributions while also lowering the threshold at which companies start paying it. This rise in employer’s National Insurance Contributions, combined with the cut in the secondary threshold, will yield nearly £25 billion a year by 2028/29. This measure was seen as a tax on jobs and may well have a significant impact on overall business costs, future jobs and employee’s salaries.
What is the new employer’s National Insurance rate?
From 6 April 2025, the employer NI rate for secondary class 1 NIC will increase from 13.8% to 15%.
The secondary threshold (the point at which employers become liable to pay NICs on an individual employee’s earnings) is currently set at £9,100 a year/£758 per month. The government announced that it will reduce the threshold to £5,000 a year/ £417 per month from 6 April 2025 until 6 April 2028 and then increase it by the Consumer Price Index (CPI) thereafter.
Changes to the Employment Allowance
Small employers can claim the Employment Allowance, which provides a flat rate deduction for businesses and charities against their annual employer NICs bill. This allowance can only be claimed by employers with an employer NICs liability below £100,000 in their previous tax year.
Currently, eligible companies with employer NIC bills of £100,000 or less in the previous tax year can deduct £5,000 from their employer NIC bill. However, from 6 April 2025, there would be an increase in the allowance threshold to £10,500.
How will this affect my payroll bill?
As a result of the increase in employers’ NICs in the tax year 2025/26, your employers’ NIC liabilities will significantly increase (if they are not eligible for the Employment Allowance).
Some examples of how this will affect your payroll bill are as follows:
For an employee earning a salary of £20,000 in 2025/26, you will pay £2,250 in secondary Class 1 NICs in 2025/26. This amounts to an increase of £746.
For an employee earning a salary £40,000 in 2025/26, you will pay £5,250. This amounts to an increase of £986.
For an employee earning a salary of £60,000 in 2025/26, you will pay £8,250. This is an increase of £1,226.
For an employee earning a salary of £80,000 in 2025/26, you will pay £11,249. This is an increase of £1,465.
The total cost to a business will vary depending on the size of the business payroll and whether they are eligible to claim the Employment Allowance.
Will employers have to pay NI on pension contributions?
Unlike a salary payment, employers do not have to pay National Insurance on employer pension contributions.
Are small businesses protected from the increase?
Smaller businesses won’t be fully protected from the increase but will be helped by the doubling of the Employment Allowance from £5,000 to £10,500. This allows small firms to reduce their National Insurance bill and will go some way to offsetting the NI increase.
It is predicted that with the changes to employers NI and the Employment Allowance, many smaller businesses with payroll under £100,000 will pay either the same or less NICs in 2025/26.
How can I minimise the impact of the National Insurance increase on my business?
Extra costs from increasing tax, additional employer NI and National Minimum Wage increases could have a significant impact on many businesses. These and other tax rises may mean that businesses have to offset additional costs in other cost-saving ways, such as:
Less hiring opportunities
Many are predicting that some businesses may put in place hiring freezes or even redundancies to enable them to pay for the NI increased costs.
Fewer pay rises
The Chancellor confirmed a 6.7% increase in the National Minimum Wage from April 2025. However, with this and the potential increase in NI liability, many companies may freeze future pay rises for employees to help pay for these additional costs.
Price increases
In some cases, the higher costs of NI to companies could be passed on through higher prices to customers.
Utilise the Employment Allowance
Small employers can claim the Employment Allowance, which provides a flat rate deduction for businesses and charities against their annual employer NICs bill.
This allowance can save a business a considerable amount of money but can only be claimed by employers with an employer NICs liability below £100,000 in their previous tax year. Therefore, you should ensure your business is claiming Employment Allowance if your NI liability was below £100,000 in the previous tax year.
Salary sacrifice and pension contributions
Employers could save over £500 annually on their NI liability per employee by setting up their workplace pension as a salary sacrifice. These savings will depend on income banding and how much employees are earning.
Salary sacrifice is an agreement between you, the employer and your employee to reduce their pre-tax annual salary in return for receiving a non-cash benefit. It is most widely used by employers to offer pension contributions, childcare, private healthcare, etc.
For business owners and directors, it’s wise to pay into your own pension directly from the company as this will then be offset against your business Corporation Tax bill. Paying into a pension on behalf of an employee can save NI contributions that would otherwise need to be paid.
Sole traders and partnerships can make employer contributions to employee pensions, and these will be offset against the business Income Tax liability. You can also save the NI contributions that otherwise would need to be paid.
Looking for business tax guidance? Get in touch with Guildford Accounting
At Guildford Accounting, our tax planning services are designed to put your tax worries at ease while strategically guiding your business to profitable success. Our experienced tax planning team can help your business operate in the most tax-efficient way, ensuring we minimise your tax burden and ensure you only pay what you owe.
With the Budget announcements now made and tax rates, thresholds and reliefs set for the 2025/26 tax year, our advice is to get a tax review for both your business and personal tax now. The earlier you plan, the better we can help and advise.
Why not get in touch via our website, calling us on 01483 355 485 or email info@guildfordaccounting.com and discover how we can help you save money? Our meetings can be arranged in person or online, whatever suits your busy schedule.
